Alibaba's (NYSE:BABA) December quarter can be best characterized a beat on the P&L, improving monetization (particularly mobile) and steady growth in active buyers, all of which positions BABA favorably as China transitions towards a consumption-driven economy. With e-commerce accounting for 10% of China's total retail sales, BABA's market power, scale and ecosystem will ensure the company to be the dominant e-commerce retailer in the foreseeable future.
On the other hand, decelerating GMV growth could potentially be a concern to many investors given that BABA is an indicator of the Chinese economy and consumer spending. That said, the Cainiao Logistics partnership will become increasingly important for BABA to ramp up its cross-border e-commerce platform to drive long-term sustainability in both revenue and margins. Judging by the success the company saw during last year's Singles' Day (see - Alibaba: Still The Champ), it appears that all the key components are in place, so now it comes down to whether BABA can execute. My view is that the company can deliver given the strength of its ecosystem, but the sell-off post earnings suggests that the Street is skeptical particularly when rival JD.com (NASDAQ:JD) is growing its market share in China. Nonetheless, I reiterate my bullish view on BABA. At 20x CY2016E earnings, the company still has a more attractive growth outlook relative to the Tencent (OTCPK:TCEHY) and Baidu (NASDAQ:BIDU).
The key takeaway from the quarter was the solid growth in the core e-commerce business that was partially driven by the Singles' Day sale. Revenue of Rmb 34.5b grew +32% y/y driven by Rmb 964b in total GMV and a blended 2.98% take-rate vs. 2.42% in the September quarter. EPS of Rmb6.43 also beat consensus estimates. China retail marketplace saw a GMV growth of +23% y/y, a deceleration from the +34% in the prior quarter, but improving monetization in both mobile (2.86% vs. 2.38% Q2) and PC (3.23% vs. 2.49% Q2) offset the GMV decline to deliver a solid +35% y/y revenue growth. More important, mobile accounted for 68% of the total GMV (vs. 62% in Q2) and highlighted BABA's gradual transition from PC to mobile. Given that majority of e-commerce transactions will take place on mobile in the future, BABA is well positioned for this trend. All things considered, a solid quarter for the company's core business.
Going forward, I believe BABA's fundamentals will be driven by its expansion into digital entertainment/media, cloud and mobile on the ecosystem side, rural expansion and cross-border on the e-commerce side, and O2O on mobile commerce/services.
WSJ reported that BABA is exiting the Meituan-Dianping to focus on its own Koubei O2O platform, and although I think this is the right, long-term direction that BABA should focus on, it is also important to highlight that a considerable investment is required to make Koubei competitive to Meituan-Dianping given the latter commands significant brand awareness in China (think of it as Groupon (NASDAQ:GRPN)+Yelp (NYSE:YELP)). Worth considering that, the O2O space is extremely competitive in that only the top two players can command majority of the market power. In this case, the top two has merged which effectively leaves BABA and BIDU at a disadvantage. However, I give credit where it is due and note that the 5m daily transactions in December by Koubei is an encouraging sign but still small relative to the 20-25m daily transactions on Meituan-Dianping. That said, more execution is needed on this front.
In terms of rural expansion and cross-border e-commerce, I see this is where BABA can certainly differentiate by leveraging its partnership with Cainiao. Owning rural China is a priority, but BABA's Tmall platform could potentially draw growing number of foreign merchants looking to cater to the Chinese consumers with notable examples including Macy's (NYSE:M), Costco (NASDAQ:COST), Burberry (OTCPK:BURBY) and Fast Retailing (OTCPK:FRCOY). Given Tmall's scale relative to JD, it is a natural choice to most of the foreign merchants, and I see this is one area where BABA can surpass JD in terms of traffic and GMV.
Finally, media, entertainment, cloud and mobile are all important components of the BABA ecosystem. I note that Youku (NYSE:YOKU), AutoNavi and AliCloud are essential for Alibaba to leverage to create an ecosystem similar to that of Amazon's (NASDAQ:AMZN) Prime Service that drives user retention and the growth of its e-commerce business.
Bottom line, I remain bullish on BABA's medium-term outlook. Although I acknowledge that GMV growth may continue to decelerate, I applaud the company on executing in its monetization.
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.