Alibaba - A Sleeping Tiger

Over the course of the last six centuries, ever since Johannes Gutenberg was credited with inventing the printing press in AD 1436, one axiom has remained true, the ever-increasing value of human eyeballs…and ears.

When Martin Luther transcribed the Latin Bible into German vernacular in the 16th century and spread the message of the Bible to fellow Germans, it was so powerful that it effectively undermined the Catholic Church’s iron grip on Europe. But whether it’s a vernacular transcription of the Bible, the explosive growth of radio from 1920 to 1950, the S-curve growth of television penetration from 1950 to 1990 or whether it’s the enormous growth in value of Alphabet’s (Google’s) search function, human attention has always been an extremely valuable commodity. Ever since the printing press, people and organisations have been able to reach and connect people further than the confines of a village in ever increasing increments until the internet allowed technology companies to cast a net over global attention.

Alibaba’s global network of merchants, customers, and advertisers has allowed the company to grow into the world’s largest online commerce platform by gross merchandise value (GMV). Alibaba helps retail consumers reduce search costs by having the broadest array of merchants and products to browse, as well as helping producers and advertisers access Alibaba’s vast population of monthly active users than they could hope to reach on their own. One can intuitively see that the value added to all these parties is increased by the addition of an incremental participant in the network creating a virtuous flywheel for growth.

Below we can see that Alibaba has been extremely effective at growing their annual active customers over time in China and more recently, in international markets. Although the company has multiple different revenue streams, we believe their most valuable asset is peoples’ attention and as long as they are growing that, Alibaba will be figuring out new and innovative ways to monetise that attention.

Aside from Alibaba’s impressive core retail business, the company has another sleeping tiger underneath its hood. Alibaba’s nascent cloud business in China remains a large future growth vector for the company. Amazon’s Cloud business, Amazon Web Services (AWS), has shown what a cloud head-start can lead to. Amazon generated $469.8 billion in total revenue in 2021, while only 12% of that revenue is attributable to AWS, it makes up 74% of the company's operating income. Alibaba’s cloud business has grown at a CAGR of 164% for the last 5 years and has finally managed to reach profitable scale as it made a 2% EBITA margin if we look at the last 12 months. The public cloud market in China has grown at a 62% CAGR for 5 years to 2020 but remains a little over one tenth of USA’s public cloud market. In our view, Chinese cloud spending will continue to follow US trends.

It is worth noting that Amazon started their cloud computing business in 2006 but revealed it to the world in 2015 when it was at scale and printing sizable profits but more importantly, it was growing revenue extremely fast with increasing operating leverage. In 2014 Amazon’s share price declined 22% to $310.35, in 2015 when Amazon revealed this business to the world the share price ended the year 118% up at $675.89 due to the quality of the cloud business and the enormity of the cloud computing opportunity.

Alibaba cloud was founded in 2009, and now after a lengthy scaling period it has reached scale and operating leverage and is growing faster than Amazon Cloud. We don’t necessarily think that Alibaba will perfectly replicate Amazon in this respect, however, if they continue to pull it off even close to what Amazon did, shareholders should do extremely well.

A slew of negative news has driven Chinese technology companies lower since early 2021 including a regulation drive by the Chinese communist party as well as near term macro-economic fears, giving us the opportunity to invest in Alibaba for clients.

We believe the macro-economic fears are not a long-term issue for Chinese technology companies and while we will write an article in the near future on our views of the Chinese government’s technology regulation drive, our views can be summarised in the following paragraph:

The Chinese government has made a series of regulatory interventions in the economy with a focus on technology. The list of reforms mainly aims at (1) enhancing and enforcing antitrust regulations; (2) enhancing data security for the government and for individuals; and (3) protecting the social interests of the Chinese populace (a socialist agenda). While we are not experts and this is not all inclusive, we believe the first two of these regulation types aren’t dangerous to our Chinese investments over the long-term and the last requires an extra filter to be used in the investment process.

Given the company’s strong competitive advantages, exposure to unique secular growth industries and incentivised management team, we believe Alibaba will do well for our clients and ourselves over the long-term (because we are invested alongside you).

13 May 2022

Alibaba - A Sleeping Tiger
.pdf
Download PDF • 646KB