Singles' Day too good to be true
By all measures, Alibaba (NYSE:BABA) Singles' Day, or 11.11 Global Shopping Festival as it is also known, could be considered a great success.
Here is the press release:
Past Singles' Day metrics have attracted skeptics - of which I'm one - who say that the numbers are not believable. Alibaba has always defended their claims and to preempt the critics this year, they published an article explaining why 11.11 blows away Black Friday (BF) and Cyber Monday. I am paraphrasing but their reasoning is that 11.11 is not simply a sale but a shopping event, which goes beyond the traditional promotion drivers and is taking shopping to a whole new level, resulting in higher engagement.
To keep the comparison to one day of shopping volume, I have put the metrics side by side in the table below (I have picked BF but you could also take Cyber Monday, the numbers do not differ much):
Singles' Day compared to Black Friday
|$17.8 billion gross merchandise value||$3.4 billion sales volume|
|Merchants selling through 2 platforms (Taobao & T-mall)||All merchants in the states|
|82% mobile ($14.6 billion)||36% mobile ($1.2 billion)|
Black Friday online sales this year were $3.34 billion, of which ~36% were mobile purchases, which equates to roughly $1.2B. So not only is Alibaba claiming to have over five times ($17.8 billion/$3.4 billion) the gross merchandise value of Black Friday sales, it also has 12 times the shopping volume conducted on mobile devices ($14.6 billion/$1.2 billion). There are a couple of problems with the comparison that Alibaba is making and I will start with the first one, gross merchandise value.
Gross Merchandise Value
GMV is not a GAAP measure and there is some flexibility on how one defines it, so let us look at Alibaba's definition (an excerpt from page ii Form 20-F, emphasis mine):
"GMV" are to the value of confirmed orders of products and services on our marketplaces, regardless of how, or whether, the buyer and seller settle the transaction."
The definition indicates that transactions may not necessarily be consumed and therefore it is not suitable as a comparison to actual sales. Even if the transaction is consumed it may not result in revenue because the transaction was settled in cash or by other (digital) means. Alibaba mentions in the press release that the entire GMV figure was settled through Alipay. That seems to indicate that they claim it is actual sales volume even though their definition contradicts that.
BF sales number is an estimate of all merchants in the US whereas Alibaba is simply one company, albeit one with a number of platforms through which all merchants can sell. It is unlikely that all merchants and vice versa all purchases in China are made through their platform. But as it turns out, that is exactly what their reported GMV numbers are implying!
There is an entertaining and thought provoking write up on the Deep Throat blog. The write up shows that Alibaba's GMV numbers are very improbable in comparison with the China's National Bureau of Statistics numbers for the entire e-commerce sector. And if you read Deep Throat's Nov. 2 blog, it highlights that "Alibaba's projected Quarterly GMV of roughly $150 billion to now be greater than all e-commerce sales of physical goods in China (US$146 billion during the same quarter)." The takeaway is that GMV does not give us an accurate insight into the true sales volume.
GMV also does not provide an accurate insight into revenue. Tim Culpan and Christopher Langner from Bloomberg penned an article titled Finance's Most Useless Metric. It shows that GMV at Alibaba is growing while revenue growth is slowing, and shows the opposite at JD.com (NASDAQ:JD). They also point out that GMV and revenue growth figures moved in the opposite direction. This disconnect casts doubt over the actual impact that GMV has on expanding the top line.
Looking at the quarterly revenue numbers in the graph below (source: Alibaba annual report, page 7 - click on graph for link), you can see that the revenue that Alibaba generated from Taobao and T-mall in comparison to GMV bounces between 2% and 3% and shows no clear correlation other than both seem to spike in Q4 when Singles' Day takes place.
Beside the revenue percentage being somewhat volatile in comparison to GMV, it is also very low. For example, if you compare the GMV ratios of Amazon (NASDAQ:AMZN) and Alibaba (source: Trefis), you will notice that Amazon's revenue to GMV is almost 50% (the inverse of 2.1 shown in the table below).
Now, I get that the Amazon business model is different from Alibaba in the sense that Amazon acts as the seller and fulfiller of goods in addition to being a platform through which third parties can sell whereas Alibaba is more of a marketing platform for third parties. The point is that while GMV has serious shortcomings, it seems a less volatile and better predictor of revenue for Amazon than for Alibaba.
To recap, GMV is not an accurate measure for actual sales volume and it is not an accurate indicator for revenue. That did not stop Alibaba from giving the metric a lot of prominence, and it did not stop analysts, journalists, and investors alike from getting excited by it. A simple word count of the annual report shows it 81 times, and the Q1 earnings release 31 times. Then something interesting happens: no reference to GMV whatsoever in the Q1 earnings release. Why?
Here is Jack Ma stating the following:
"We believe Alibaba is an engine, which has financial services, logistics, cloud and other services. Our resources are invested in a globalized world over the next 20 years. Therefore, we have stopped reporting GMV numbers in the quarterly reports."
I am not 100% sure I follow the logic there, but they abandoned one of their most beloved metrics because it distracts from their other activities? Apparently, it is distracting in the quarterly results but not in the headline of the press release.
The other revenue driving activities that Jack is referring to are relatively minor. For example, cloud computing accounted for 3% of revenue in 2016, basically unchanged from 2.6% four years ago (page 2 of form 20-F 2016). Their logistics activities are not fully consolidated and with financial services I presume he is referring to Alipay, but that is no longer fully part of Alibaba (at least not from a shareholder point of view).
As you know, the SEC is investigating Alibaba and maybe we will hear in due course what their findings are. Suffice it to say that the SEC looks unfavorable on placing more emphasis on non-GAAP metrics over official US-GAAP metrics. Perhaps the decision to remove it from quarterly reports is not as Jack indicated but rather a reaction to conversations with the SEC.
On Oct. 17, the SEC sent confirmation of receipt for Alibaba's answers along with a reminder (see below).
It is a standard letter that to my knowledge the SEC sends to every company that submits financials to them. One has to love the bureaucratic reminder from the SEC to its submitter - i.e. that they are responsible for accuracy of the numbers. Yes, you would hope that they understand that. One could imagine a hypothetical conversation to have preceded it, something along these lines:
Jennifer Thompson (SEC): On what did you base your reported numbers?
Daniel Zhang (CEO Alibaba Holding): Well, you see, we had this intern and (s)he was sloppy with the numbers, and we forgot to double check. Sorry, honest mistake.
Jennifer Thompson (SEC): I remind you that the company and its management are responsible for the accuracy and adequacy of the disclosures regardless of what your staff does or doesn't do.
Jennifer Thompson (SEC): And oh, before I forget, Regulation G prevents you from displaying GMV as prominently as you have.
Daniel Zhang (CEO Alibaba Holding): No worries, although we have used that metric over 200 times in the last four quarterly earnings press releases and annual report, we now came to realize that it was kind of distracting everyone from all the other great stuff we are doing. Consider the metric removed from our quarterly reports. We can still use it for press releases and blogs right?
On page 30 of Alibaba's Form 20-f it is disclosed that Singles Day operational metrics are part of the SEC enquiry.
Mobile purchase volume and propensity
Back to the Singles' Day metrics. Both the volume ($14.6 billion versus $1.2 billion) and the mobile purchase propensity as a percentage of overall (82% versus 36%) look out of proportion.
When we try to find an explanation why Alibaba claims to observe such high behavior, we can probably rule out mobile device penetration because both are close to each other (77.3% for China, 80.6% for the US).
With regards to volume, the obvious factor is population. Population in the States is only a factor .24 of that of China (324 million US, China 1.37 billion). Offsetting that however is that consumer spending is much higher in America than China. The United States has a GDP of $18 trillion of which $12.3 trillion (~68%) is driven by consumer spending. China GDP is estimated at $11 trillion of which approximately 37% is estimated to be driven by consumer spending. Taking 68 over 37 implies that Americans outspend the Chinese by a factor 1.8 on consumer spending.
Combining the factors (12 x 1.8 x .24) gives us an estimate of how Alibaba's customers' mobile purchase behavior is close to 5 times higher than the mobile shopping behavior of consumers in the States. That is an incredible factor and outside of Alibaba's metrics, I could not find any source that corroborated or justified that multiple.
Mobile Monthly Active Users (MAUs)
Alibaba reported to have 450 million mobile monthly active users on their China retail marketplaces and 75% of those - ~338 million - are under 35 years old, according to Alibaba co-founder and vice Chairman Joe Tsai. When we look at China demographics and the population pyramid, that would imply that not only do they have close to every single person between the age of 18 and 35 in China as an active user, but it would also imply that all of them have access to a mobile device. Nielsen estimates the total number of online shoppers in China at the beginning of the year at 380 million, which, if correct, would imply that all of them shop with Alibaba.
One could argue that the referenced data sources are incorrect, or maybe Jack Ma and crew simply performed some magic.
Jack Ma performing a magic trick on Singles' Day.
Alipay peak payment processing
Moving on to Alipay, the payment network rib that was taken out of the ribcage of Alibaba in 2011. In the Singles' Day press release, Alibaba mentioned that Alipay processed more than 1 billion payment transactions in total. Alibaba shareholders are no longer the owners of Alipay (at best they may own 37%, but that remains to be seen), so the reference to Alipay numbers is a bit out of place.
Alibaba mentioned in the press release that the entire GMV figure of $17.8 billion was settled through Alipay. That implies that they claim that the GMV figure is equal to actual sales volume, even though their own definition of GMV contradicts that.
At the peak of the Singles' Day frenzy, Alipay processed 120,000 transactions per second. That is a fantastic achievement! To give you perspective, Visa (NYSE:V) - which operates the largest payment network in the world - can process about 66,000 transactions per second, according to a 2015 stress test. They made a mug to celebrate the fact, so it must be a formidable achievement (see picture).
While that is the maximum capacity, in practice, the actual peak in transactions has not come close to that number, yet Alipay can handle processing 120k per second! The payment technology engineers at Visa must be scrambling over each other to apply for a job at Alipay. Anyway, a new world record perhaps, or another magic trick?
Visa maximum number of transactions per second in 2015 (a.k.a. the mug number).
Then there are those orders. About 657 million delivery orders were made, up 41% from 467 million packages last year - this is more than the 630 million packages UPS (NYSE:UPS) delivered between Black Friday and New Year's Eve in the US - (their words, not mine). Again, wow! A one-day sales volume that beats all volume between BF and Christmas. Now if this number refers to all packages delivered by all third party delivery services working for all merchants in China - then yes, maybe.
Alibaba is primarily in the marketing business according to the description of their monetization model (page 108 of Form 20-F 2016). It is not in the business of selling its own physical products nor is it in the business of fulfillment. Or is it? Alibaba holds a 47% unconsolidated stake in Cainiao Network, a three-year-old private company with 1.7 million affiliated workers.
Just to be clear, these workers are not employed by Cainiao; they are employed by third-party logistical partners - but still, it is a formidable number. For comparison, it is roughly equal to the combination of the top 4 package delivery companies in the world: UPS has 444,000 employees, United States Postal Service has about 492,000 employees, FedEx (NYSE:FDX) has 400,000, and Deutsche Post DHL has 500,000.
If you held close to a 50% stake in a logistics network,
- Almost equal in size to USPS, UPS, FedEx and DHL combined, and
- that shipped 1.4 billion of packages for the past 3 Alibaba's Singles' Days alone (i.e. Alibaba and Cainiao are material to each other), you
- may want to consider adding "Logistics" to the description of your monetization model.
On page 30 of Alibaba's Form 20-F, it is disclosed that their treatment of the Cainiao Network as an equity method investee is part of the SEC enquiry.
On the face of it, the 11.11 Global Shopping Festival results were great. GMV of $17.8 billion beat the 2015 event by 32%. Mobile GMV settled through Alipay was 82% versus 69% last year. More than 1 billion payment transactions and 450 monthly active users. By all standards one could consider this a stellar close out of the calendar year for Alibaba.
Despite the extraordinary claims there are reasons to be wary of the metrics:
- GMV is not equal to actual sales and it is not a good indicator of revenue.
- Mobile purchase propensity is a multiple of Black Friday and has yet to be corroborated through third-party data.
- MAU number and its demographics imply Alibaba has the entire market.
- Cainiao's three-year old logistical network equals the combination of the world's top four package delivery companies and it is prominently mentioned in their Singles' Day press releases, yet it is not part of Alibaba's monetization model.
- Alipay's claim of having settled $17.9 billion in GMV is dubious given the definition of GMV.
- Alipay may unwittingly have claimed a world record with 120,000 payment transactions per second.
Disclosure: I am/we are short "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.
Additional disclosure: I have undertaken reasonable efforts to check - but can not guarantee - the accuracy of the data and data sources referenced in this article. Not all arguments for the short position are reflected in the article and the article is not meant to be investment advice.