Alibaba (NYSE:BABA) sent out three key messages to the market in its fiscal 2Q 2016 results. First, the gravity of the e-commerce slowdown has been greatly exaggerated by the media and the analyst community judging by BABA's solid GMV growth. Second, monetization remains robust, particularly mobile, and the improvement in take-rate highlights BABA's best-in-class monetization capability. Third, the strength in its cloud services segment remains overlooked, but given its growth profile and global expansion focus, I would not be surprised to see Aliyun rival Amazon's (NASDAQ:AMZN) AWS in the long term.
Finally, growth in active buyers, mobile monetization and O2O highlights the sustainability of BABA's overall ecosystem. Although the bottom-line beat was due to a one-time gain, revenue, user growth and monetization were what the market was focusing on, and indeed, BABA delivered on all the key metrics. The results certainly alleviated several key concerns with the stock. With that aside, I expect shares to recover meaningfully from now until the end of the year. I remain bullish on BABA for it is my top pick among the large-cap Chinese internet stocks.
Total revenue of RMB 22.1 billion, +32%, was driven on the back of a +28% growth in GMV. Clearly, BABA's GMV growth metrics highlight that the country's largest e-commerce company continues to benefit from rising consumer consumption and the shift in preference from retail spending to online spending. More importantly, this highlights my view that China's economy is not slowing down as bad as others have suggested and that the transition from an export-driven economy to a consumption-driven economy is well underway. In my view, BABA remains well positioned to capitalize on this trend given its e-commerce scale, unrivalled e-commerce platform and best-in-class logistics system to meet the underlying demand of Chinese consumers.
Core e-commerce metrics with active buyers of 386 million, +26% y/y, highlight the stickiness of BABA's platform. Although Taobao's growth continues to decelerate, TMall's growth is becoming a key driver, and this is important given many investors are bullish on rival JD.com (NASDAQ:JD) given the platform's focus on authentic goods. As TMall continues to scale up, BABA's product quality can easily rival that of JD, in my view, particularly if BABA maintains its current momentum of attracting brands onto its platform.
Highly encouraging was the mobile monetization rate, which should alleviate some investor concerns on BABA's transition towards mobile. Overall, mobile GMV was 61% of total GMV, growing at +121% y/y and achieving an impressive 2.39% take-rate vs. 2.16% last quarter. A long-term take-rate of a 4-5% level could be realistic as BABA flexes its pricing power. PC's declining take-rate is a given and not really a surprise, but at this pace, mobile take-rate will likely match the PC take-rate in the next quarter or so.
Finally, BABA's ecosystem remains the best in class with Koubei and prior investments in AutoNavi and UCWeb, all of which are starting to pay dividends. Cloud service revenue could potentially be another meaningful growth driver. At 2% of BABA's revenue, Aliyun presents an attractive upside potential given the development of AWS. Net-net, BABA's strength in e-commerce, and growth opportunities in mobile, media and cloud are all supportive of its strong FCF generation capabilities (FCF +52% y/y despite doubling of capex). I reiterate BABA as my top pick in China's internet space.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.