I initiated a position in Alibaba (NYSE:BABA) for my Project $1M portfolio earlier in the year, when the stock was trading at $66.75. The stock has advanced some 18% since I added it. In light of the Alibaba's recent investor day, and recent investigations by the SEC, I wanted to reexamine my bullish thesis and consider whether any of these factors substantially change the outlook on the stock.
My initial thesis around Alibaba was built around the fact that its natural barriers to entry will ensure long-term profitability. I was of the view that the company benefits from strong network effects, courtesy of being the dominant e-commerce play in China. I was looking for cues in the company's investor day that continue to support this.
2016 Investor Day
The most bullish takeaway from the BABA investor day was that GMV (Gross Merchandise Volume is expected to double by fiscal 2020 from fiscal 2016. The firm also communicated an expectation that it would be able to target 2B consumers across the globe by 2036, which is clearly a staggering number of users. 1B of these users are expected to come from emerging markets outside China, with 400-500 M users from developed countries.
If BABA is able to hit this subscriber number, retailers globally would be falling over themselves to be a part of the Alibaba platform in an attempt to get a piece of the volume that would come from such a large subscriber base. Alibaba would be one of the few commerce platforms serving such a broad beachhead of users, an effect that would naturally reinforce AliBaba's network effects.
What was also given prominence during the Investor day was BABA's aspirations to be a data company, and continue the shift away from being a purely transactional commerce platform. It will be interesting to see whether BABA makes use of data to improve the recommendations and optimizations on its own platform, or whether it can leverage data to serve as an added revenue source which it can monetize for merchants. Alibaba seemed to suggest that it is still figuring out the best pathway for data monetization, with Jack Ma saying "we don't know how to make money off data today". Cloud computing, big data, financial services and logistics are all expected to be a big part of Alibaba's future and assist its efforts in data collection .
Alibaba is making aggressive investments in emerging market to seed future sources of growth, and intends to continue doing so. The primary objectives behind this investment strategy is to increase user acquisition and engagement, improve customer experience and expand the set of products and services that are offered to users. All of these actions are designed to further reinforce the network effects of BABA, and if successfully executed, will significantly broaden its moat. South East Asian marketplace Lazada Group, as well as food delivery service ele.me and Indian payments provider paytm are a couple of examples of such recent acquisitions.
Softbank Sale and SEC probe
While BABA's investment day was quite positive on the whole, SoftBank recently disclosed an intention to divest a significant portion of its Alibaba holding, prompting some negative speculation that Alibaba's best days could be behind it. I suggest that the sale was far more likely motivated by SoftBanks large debt load, and the precarious position of its cash consuming investment in Sprint, which shows no signs of being able to see sustained free cash flow. Thus I don't read too much into this sale in the context of BABA's long term outlook.
The SEC also disclosed a probe into Alibaba's consolidation practices and related party transactions. While governance at Alibaba does leave a little to be desired (dating back to historical practices such as the transfer of AliPay to a private company controlled by Jack Ma), I don't find anything too sinister in the scope of the investigation. There doesn't seem to be any suspicion of underlying fraud or accusations of accounting irregularity. Alibaba also generates significant free cash flow, which gives me comfort that any account treatment issues don't fundamentally threaten the overall health of the business.
Overall, I remain confident in BABA's long term outlook and the company's position within my growth portfolio. I believe I was able to make my investment at a reasonable price, and expect to see good long term appreciation.
Disclosure: I am/we are long BABA.
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.