The Chinese E-Commerce Marketplace
When talking about online marketplaces, the dominant company seems to be Amazon, with its astonishing multi-decade growth and its $1.8T market capitalization. But this is not the whole story.
While Amazon dominates the North American market, it is fiercely struggling with other large marketplaces abroad. For example, Amazon has been struggling to compete with MercadoLibre in the South American markets and with SEA in Southeast Asia.
Above all, the Chinese e-commerce platforms stand out, benefiting from direct access to the massive and low-cost Chinese manufacturing ecosystem and a local market of 1.5 billion people. In total, 44% of global e-commerce sales are through Chinese e-commerce platforms.
Source: Forbes
One of these marketplaces is now out-competing Amazon in Europe, as Alibaba became the continent’s biggest online marketplace in 2023. So, far from being only competitive in its “protected” home market in China, Alibaba is now a powerhouse marching to conquer international markets.
Amazon Vs Alibaba
Before exploring Alibaba’s business further, it is worth comparing it to its more famous and richly valued competitor.
Amazon generated $604B in revenue in the twelve months ending September 2024, with $44B in net income. In comparison, Alibaba generated $133B (950 billion yuan) over the same period, with $9.7B in net income. So overall, it could be said that Alibaba is 1/4th of Amazon. However, with a market capitalization of $196B compared to Amazon’s $1.8T, it is valued at 1/10th of Amazon.
In the past few years, Amazon’s revenue has grown by 10-12% yearly. Meanwhile, Alibaba’s growth has been a bit more irregular, boasting a contraction in 2023 (-6%) and only 3% growth for 2024.
Overall, Alibaba can be said to be valued with much lower multiples due to lower growth recently, in part caused by China’s longer-lasting COVID lockdown than in the rest of the world and its economy struggling from a deflating real estate bubble.
Additional factors are the US-China trade tensions, as well as a crackdown of the CCP on Alibaba founder, Jack Ma, in 2022.
Alibaba Structure
Alibaba was launched in 1999 and has grown progressively into a massive company with many divisions. Recently, it was reorganized into six major segments.
Source: Alibaba
Taobao & Tmall
This is the largest part of the business and the leader in the Chinese e-commerce market, with a strong focus on the retail market. After a period of losing market share to its local competitors, it has restarted to grow in Q2 2024 at high-single-digit online GMV (Gross Merchandise Volume) and double-digit order growth.
This restart of growth was achieved through several means:
- Better algorithmic recommendation and product match to increase conversion.
- Increasing price-competitive offerings through diversification of suppliers.
- The launch in April of Quanzhantui, a new AI-powered platform-wide marketing tool for merchants, providing automated bidding, optimized targeting, and performance dashboard visualization.
- A new AI Chatbot called Dianxiaomi, now available to all merchants.
The release of AI tools to all merchants is in line with the long-standing principle of Alibaba being a level-playing field tool for SMEs to compete with larger companies.
This was key to Alibaba’s historical success, as it allowed it to leverage the hundreds of thousands of smaller companies and entrepreneurs in Chinese society, creating at the time an unprecedented abundance of products and designs at competitive prices.
Alibaba’s 88VIP membership (similar to Amazon Prime) has also been growing at double digits. It offers shopping discounts, exclusive prices, take-away red packets, and watching videos without advertisements.
Overall, Tmall is still one of the largest e-commerce platforms in the country, with only Douyin (TikTok out of China) able to seriously attack its incumbent position in the last few years.
Source: Baiguan
Alibaba Cloud
Large e-commerce platforms, including Amazon and Alibaba, have to manage massive cloud computing capacity for their platforms. So, it makes sense for them to branch out and offer this existing capability to others.
This allows them to build their cloud capacity at an even larger scale, reducing costs for both B2B clients of the cloud service, and the internal demand for cloud computing.
Today, the cloud segment is Amazon’s most profitable segment. Alibaba Cloud is facing a tougher competitive market in China, with strong contenders being Huawei and Tencent, having taken market share from almost 50% of Alibaba in 2020 to “only” a third of the market today.
Source: Jeff Townson
This strong competition should not overshadow that the overall Chinese cloud market is growing very quickly, leading to Alibaba Cloud growing at a double-digit percentage.
A strong point of Alibaba is its adoption of AI in cloud computing, as well as its triple-digit year-over-year growth in the adoption of its AI tools. The AI push includes generative AI like LLMs (Large Language Models), but also custom apps and has cut costs by half, making them a lot more affordable.
Alibaba’s AI ambitions are large, with the triple goals of:
- Developing its own “foundational models for AI and progress towards AGI”.
- Integrate their LLM within every Alibaba operations as well as all its customers (from buyers to merchants), creating scale and cost-efficient AI functionalities.
- Using its proprietary LLM, Tongyi Qianwen 2.0, launched at the end of 2023, through industry-specific models.
AI Ecosystem
Alibaba is also at the forefront of creating a Chinese AI open-source ecosystem, with the community ModelScope (launched in 2022), the largest in China, using 2,300 AI models, based on Alibaba’s “Model-as-a-Service” initiative.
With ModelScope, we aim to simplify and reduce the cost of developing, customizing, and deploying AI models for developers and corporations, thereby enabling the creation of revolutionary AI applications that have a positive impact on society.
For instance, FaceChain, a third-party application based on multiple AI models on ModelScope, can generate a portrait from just one or two uploaded photos. We leveraged this model to help some elderly individuals in China develop digital portraits, which delighted them.
Zhou Jingren – Alibaba Cloud’s CTO
International
This category includes Alibaba.com (wholesale) and Aliexpress (retail sales), but also Trendyol in Turkey, Miravia in Spain, and Lazada (16.4% market share in SE-Asia e-commerce).
This has long been the largest and best-known export marketplace for Chinese goods, long before the arrival of Pinduoduo’s Temu in the Western market. It is also the branch responsible for taking over Amazon’s top spot in the European markets.
The segment is growing extremely strongly, with 32% year-to-year growth and a strong performance in selected markets in Europe and the Gulf Region. Revenue from the segment was $3.2B in Q2 2024 from retail and $771M from wholesale.
The revenue from Alibaba is mirrored by the impact it has on these economies, with exports from 27 European countries via Alibaba’s platforms totaling €32.3B in 2023 and contributing a combined €57.9 billion to the gross domestic product of Germany, France, Italy, and Spain for the 2019-2023 period.
Alibaba is also exploring alternative models in other markets, such as a partnership with Brazilian Magazine Luiza (“Magalu”) to open and operate a storefront on AliExpress and vice versa.
Due to massive investment into growth, the segment is not profitable yet and lost $510M in Q2 2024.
Cainiao
This is the logistics arm of the Alibaba Group. Its revenue grew 16% year-to-year to $3.6M. The section is mostly there to help cross-border activity and boost the logistical capability of the group as a whole, as well as the capabilities of merchants on Alibaba’s platforms.
For example, it installed a total of 5,000 package lockers globally before Singles Day (a big sales event in Chinese e-commerce), especially in Russia, Poland, Spain, and France.
Ant Group
Ant Group is Alibaba’s former financing/banking division. It includes the very popular payment system AliPay, as well as various solutions for online banking, wealth management apps, insurance, loans, etc.
Source: Medium
Currently, Alibaba Group owns 33% of Ant Group. At the end of 2023, a proposed buy-back valued Ant Group at $79B, putting Alibaba’s share at a value of $26B, much lower than the previously expected valuation for the IPO in 2020.
The group became the target of an investigation by regulatory authorities and saw its planned 2020 IPO canceled at the last minute.
This was part of an overall effort to reduce the influence of Alibaba’s founder, Jack Ma. Today, Ma’s voting rights were reduced from 50% to 6% and the Ant Group is a lot more independent than in the past.
This could open the way for an IPO, as it removes the political risk of the CCP conflict with Jack Ma, but the exact date is still undetermined.
Services & Others
Services
Over the years, Alibaba Group has accumulated an array of secondary businesses. For example, ele.me food delivery service, Amap online map service, as well as digital media and entertainment (Youku, Alibaba picture, Damai),
These activities are relatively small compared to the rest of the group and operating at a loss.
Source: Alibaba
Others
This segment gathers all the other various businesses acquired or developed internally over the year, including DingTalk (office tool), Quark (search engine), Fliggy (travel tickets), Alibaba Health (digital healthcare), and SunArt (online supermarket).
Some investors have criticized these businesses as distractions, and overall, it seems Alibaba’s management is now looking at either turning them profitable or stopping/selling them.
Dual Primary Listing And VIE
VIEs
Stocks of Chinese companies are often complex structures, due to Chinese laws technically forbidding foreign ownership. At the same time, Chinese companies (and the Chinese government) are eager to raise capital abroad to finance the growth of the country’s economy and its corporations.
A compromise was found with the VIE (Variable Interest Entity) structure. Often based in the Cayman Islands or directly in the US, these corporate structures have a contract with the mother entity (for example, Alibaba in China), guaranteeing part of the profits of the “real company,” replicating ownership, but without direct “real” ownership.
Source: Corporate Finance Institute
While less strong of a claim on the company than direct share ownership, this has been an accepted option to invest in Chinese companies for many years.
However, a secondary issue is that Alibaba was publicly listed in the US, reducing its stock accessibility to Chinese investors.
Dual Primary Listing
Due to the listing complexities, Alibaba was mostly off-limits for most of China’s 210 million active retail investors – a pity when considering the reach and brand power of the company in its home market. It was especially a missed opportunity as a key factor in Alibaba’s low stock price (fear of sanctions) would not be relevant for Chinese investors.
To solve this, the company has changed its listing structure, achieving a dual primary listing status. So the company has become dual primary listed on the Hong Kong Stock Exchange and the New York Stock Exchange from August 29th.
This is also in line with the CCP’s goal of keeping/making Hong Kong an international finance hub independent of Western investors and capital.
Alibaba’s Valuation
There is definitely a “China discount” being applied to Chinese stock valuation, with world-class companies like Tencent, Alibaba, Jinko Solar, or CATL trading at a much lower valuation than their American counterparts.
Part of this discount is rational, with geopolitical tensions and trade conflict flaring between the US and China, with the background of China’s goal of reunification with Taiwan and US critics of Chinese support to Russia. We can, however, roughly calculate the scale of this discount.
First, we can consider that part of Alibaba’s value includes the $26B worth of participation in the Ant Group (which has been trading at a discount since the canceled 2020 IPO). In addition, the company has net tangible assets worth $96.6B, of which $80B is in cash.
So depending whether we want to consider just cash or net assets, together with Ant Group, this puts the other activities at the current valuation ($196B) minus $106B or $122B (cash or net asset + Ant Group).
This puts at a $74B-$90B valuation a business with:
- 1/4thof Amazon revenues.
- The leading market share of China’s e-commerce sector (around 1/3rdof the total).
- The number one position in Europe’s e-commerce sector.
- Controlling 1/3rd of the Chinese cloud market.
- Now accessible to domestic Chinese investors, very familiar with the company and unconcerned with risks of delisting from US markets.
Returns To Shareholders
At the end of 2023, Alibaba distributed its first-ever dividends, looking to put to rest the idea that Chinese corporations do not return capital to shareholders.
The group aims to lift its return on invested capital into the double digits in the coming years.
It has also initiated a massive share repurchase program, taking advantage of the depressed share prices. In the last 3 years, the company reduced total shares by 9.5%, having spent $30B at an average price of $102/share.
If the repurchase of $10B / year continues, this would result at the current price in a 3-4% total share count reduction per year, on top of the current 2.5% dividend yield, not counting the growth of the business.
Conclusion
Alibaba is not a risk-free investment, with its leading position in e-commerce having attracted mostly value-destructive strong attention from both the Chinese and US governments, leading to a multi-year stock price decline.
It also operates in a very competitive environment, with the Chinese e-commerce and cloud computing sector being a lot more competitive than in the West. In that context, while Alibaba is not disappearing tomorrow, it constantly needs to fend off competition from PDD/Temu, Douyin/Tiktok, Tencent, Huawei, etc., more so than from Western competitors.
It is however still a very strong leader in all its main segments of Chinese e-commerce, international e-commerce, and cloud computing, with a large ownership in the fintech giant Ant Group.
Less tense relations with the CCP & a related potential IPO of the Ant Group, continuous growth in cloud, e-commerce, and international segments, as well as the Chinese economy growing back at 5% yearly, are all strong supports for a revaluation of the stock at some point in the future.
The company is also putting behind the Jack Ma era and seems to progressively find its new marks with a renewed management team and a reorganized group.
Combined with a low market capitalization discounting the core business at less than $100B (versus Amazon’s $1.8T), Alibaba is a value investor pick. It has also regularly disappointed in the past few years, with a declining and then stagnant stock price. So, it is not without risk, either, and investors should carefully consider both the risks and potential of the stock.
