Alibaba has a lot going on. Parsing through its S-1 is not an easy task.
But I have begun to view the company playing three different roles:
- Alibaba as a commerce platform
- Alibaba as a ‘financial institution’
- Alibaba as a venture investor
I plan to post on each of these in greater detail in coming weeks, but let me explain briefly here where I am headed.
Alibaba as a commerce platform
The core of Alibaba’s business is to provide online commerce platforms for its 279 million merchant partner accounts. They do this through a dozen key websites, and this is how they are most commonly viewed. What makes the stock really interesting is the company’s potential to capitalize on those relationships and find new ways to monetize them. In their last quarter, Alibaba generated about RMB 1,800 in merchandise value (GMV) and RMB 57 in revenue from each of those accounts. Those figures have been slowly growing over the four years of data we have available from the S-1, starting at RMB 1,337 and RMB 42 respectively in 1Q10. That is a good pace, and there are reasons to think the company can expand on them further. Put simply, Alibaba has figured out how to be useful to merchants, and there is reason to think they can expand on that in the future.
Alibaba as ‘financial institution’
Perhaps the most important feature they offer their merchants revolves around financing. For small and medium enterprises (SME) in China, obtaining access to financial services is hard. We are not referring to big, complex financial transactions but rather simple workhorse products like small business loans and receivables factoring. In the US, these services are commonplace at every bank, but are far less readily available in China.
Take the issue of working capital as an example. It is common for companies to pay their suppliers on 180 days or 270 day terms there. This is a circular problem, as one company cannot pay its suppliers because it can not collect from its customers. By contrast, transactions conducted on Alibaba’s platform have payment terms that are essentially reduced to shipping times. This is a huge advance, but one that is often overlooked.
Alibaba figured out a few years ago that they could do more than this. They have been steadily expanding their financial products over the years. On the consumer side, they have a range of lending and investment products. For SMEs, in 2010 they launched a Micro Loan service. These are essentially small business working capital loans, with terms of 7 to 360 days. The company has 400,000 borrowers signed up currently. The interest from these loans is reported as “Other Income” on the financial statements, and while small it is by far the fastest growing item on the income statement. We think this kind of product will remain a very important driver of loyalty and keep merchants on the platform.
Of course, we have been referring to this as something that ‘the company’ offers, but in reality, these services are provided by another company – Ant Financial, formerly known as Alipay. Alibaba spun this out ahead of the IPO to comply with government regulations. There are extensive contractual ties between the two companies, and executives receive incentive compensation from both companies. So while we see these financial services as very important to the core platform, investors should be aware of the risk and complexity associated with this relationship.
Alibaba as venture investor
Alibaba has acquired or invested in dozens of companies in recent years. There is no easy way for outside investors to track the progress of these deals. So we have started to think of them as a venture portfolio targeting China’s Internet. A few of these deals will end up as write-offs, most will produce decent returns and a few will prove big hits in their own right.
Of course, Alibaba is not a financial investor, they are strategic buyers, and this is what makes the deals potentially very interesting. A big driver of the company’s future prospects will be their ability to tie these investments into the core platform.
For example, last year Alibaba acquired Autonavi, the leading map data provider in China. Autonavi was a good business in its own right, selling a scarce asset into a growing market. However, done well, Autonavi could open up the door for Alibaba to enter all kinds of geo-centric busiensses. In particular, we think it would be interesting to see if Alibaba can use the asset to gain a bigger footprint among local services such as restaurants and repairmen. This would mark a bigger move for the company, beyond their traditional base of product sales. And that is just one potential example.
At heart, Alibaba has many levers they can pull to expand and enhance their core merchant platform.