Alibaba: Dancing With The Elephants

| About: Alibaba Group (BABA)


ET reported that BABA is setting up a tech center in India.

Paytm may allow BABA have direct e-commerce presence in the country, a potential negative to local rivals.

Bullish on BABA and its cross-border outlook.

India's Economic Times reported that Alibaba (NYSE:BABA) is planning to set up a tech development center in India in what I believe to be the company's first step in making a major international expansion. On the same token, India's Paytm, an India-based mobile payment/e-commerce company that's backed by BABA, is considering to spin off its online marketplace so that BABA can establish a direct presence in India. In return, Paytm is seeking an additional investment of $300-$400m in its marketplace. Neither BABA nor Paytm have confirmed the sources but I believe this is highly credible.

Given the recent deceleration of China's e-commerce market and uncertainties involved with the economy, expanding in India is a logical step given the market is still fragmented and the existing players have yet to achieve a scale that is comparable to that of BABA. In other words, market share gain against Flipkart, Snapdeal or event Amazon (NASDAQ:AMZN) could see market share contraction should BABA leverage its scale and cross-border logistics capability. Longer-term speaking, a successful expansion into India could embolden BABA's global ambition of expanding in North America via investment or an outright acquisition of eBay (NASDAQ:EBAY). I have argued time and time again that although eBay may not be growing as fast as AMZN, the platform and the brand continue to have value and could be highly attractive to BABA as it looks to expand in North America via M&A rather than organic growth. I remain bullish on BABA. The company is my top pick among the large-cap internet names.

According to a PWC study, India's e-commerce market is expected to reach $10-20b by 2017-2020, growing at a 40-50% CAGR. The primary drivers include rising internet penetration, a younger tech-savvy demographic and improving logistics infrastructure. With China's e-commerce decelerating in recent years, BABA needs to diversify its business model that's heavily leveraged to China's e-commerce space. India is a logical choice given its geographic proximity to China, which allows BABA to conveniently ship items across the border via its Cainiao logistics partnership. Additionally, BABA has already made important investments in the region via Paytm, a leading mobile payment platform in India (see - Alibaba: Investing In Paytm). Worth reminding investors that payment is an important factor in driving e-commerce due to the convenience of facilitating purchases for the consumers.

Media reported that Paytm is planning to spin off its e-commerce platform to make way for BABA to establish a direct presence in the country while spinning off its payment, O2O and digital wallet business. I think this is a logical move for Paytm judging by the eBay-PayPal, BABA-Ant spin off where digital payment platforms could obtain a higher valuation post spinoff. BABA could integrate its TMall or Taobao platform with the Paytm marketplace so Indian buyers could pay via Paytm for items in China and BABA could leverage Cainiao for cross-border shipments. I believe this will drive my medium-term thesis on BABA which is cross-border e-commerce will be a key driver for its e-commerce growth in the next 5 to 10 years.

On a final note, a successful entry into India would be a precursor to an entry into North America in which BABA may invest or outright purchase eBay marketplace. With BABA already working with US Postal Service (see - Alibaba: Scaling Up Logistics In The U.S.) I do not think it is a stretch for BABA to make its way into the US within this decade. Such scenarios would be a threat to AMZN and this is the single biggest long-term concern I have on the company despite my favorable near-term view on the stock (see - Amazon: Beauty Is Only Skin Deep).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.