Alibaba: What's In Your Wallet?

| About: Alibaba Group (BABA)

Summary

Alipay to partner with 1 million merchants in the next three years as part of Alipay’s global push.

Positive implications for BABA, given the domestic competitive overseas opportunities.

Remain bullish on the stock due to its dominance in e-commerce, cross-border e-commerce opportunity, and integration of its ecosystem.

Alibaba's (NYSE:BABA) financial arm Alipay dominates China's internet finance, fintech, digital payment and digital wealth management businesses. However, the payment side is facing increasing competition from rivals such as Tencent (OTCPK:TCEHY) and Baidu (NASDAQ:BIDU) that have successfully leveraged their respective core competencies to take shares from Alipay. Notably, Tencent has achieved moderate success in leveraging its WeChat user base to push its mobile payment and O2O ecosystem while BIDU is seeing accelerated user growth in its Baidu Wallet since its acquisition of Nuomi that made it one of the largest O2O platforms in the country. That said, future growth will be hard to come by and it is understandable for BABA to expand its overseas presence where fintech disruption is more mild and concentrated in a handful of internet/tech companies (i.e. Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL)). In my view, the overseas market offers BABA the best opportunity to maintain its ecosystem competitiveness and generate sustained revenue growth.

To be clear, I'm bullish on BABA given its dominance in China's e-commerce business, prospects of cross-border e-commerce, and the integration of its ecosystem, which I view to be the best in class. However, like any company that's overly stretched, execution risk remains and BABA could fall behind rivals in certain key growth areas.

SCMP reported that BABA is expanding its Alipay presence by partnering with 1 million offline merchants in the next three years and allow Chinese tourists to spend money abroad using its mobile wallet. Given the increasing convenience of overseas travel for the Chinese, such a move makes strategic sense. By partnering with merchants around the world, over 200m Chinese users will be able to pay with Alipay when they are abroad. The extension of this convenience strengthens BABA's overall ecosystem, and I believe that Alipay will be accepted at major retail locations around the world similar to how UnionPay, China's credit card processing firm, is accepted at most retailers when most of its businesses are driven by Chinese tourism. I note the World Travel and Tourism Council reported that Chinese tourists spent $215b abroad last year, making them the biggest spender globally.

In the near term, Korea, Japan, Indonesia and Southeast Asia are the probable areas to expand given their geographical reach. I note that 17% of the merchants are situated in the ASEAN region. North America is certainly on the list, and this will be a negative to essentially all payment platforms such as Apple Pay, Android Pay and Visa (NYSE:V) and MasterCard (NYSE:MA).

In short, I remain bullish on BABA, and encouraged to see the company is moving in the right direction on addressing domestic concerns, but I also note that speed and execution is critical to its growth outlook.

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.