BABA - Alibaba

[DooDiligence]

4 hours ago, LearningMachine said:

The difference here is that CCP is watching.  Alibaba said on the call that they will be in constant touch with regulators going forward to make sure they are abiding by their guidance going forward.

Also, are you agreeing that they won't increase the total take rate anymore from 4.5%, in order to meet their public promise of reducing cost to merchants of operating on their platform, making some mature services free, which they admitted will impact top line?

In the past, they were able to increase the take rate by 80%, resulting in 80% revenue growth.

If you still think they will be able to increase the take rate, how much do you think they will be able to increase it?

Your guess is as good as mine.

Alibaba has undoubtedly crushed a lot of businesses. The CCP has heard the complaints and is acting to curb monopolistic power more than to simply control pricing. Alibaba is not the only business under the gun in this regard.

www.aljazeera.com/economy/2021/1/26/chinas-big-tech-clampdown-why-some-businesses-stand-to-benefit

I wouldn't be surprised if some form of breakup wasn't required in the future. It could actually turn out profitable if they were forced / allowed to IPO a few businesses.

Jack Ma should probably stop thinking he can shoot his mouth off like Elon Musk.

Edited April 13, 2021 by DooDiligence

[LearningMachine]

3 hours ago, DooDiligence said:

Your guess is as good as mine.

Alibaba has undoubtedly crushed a lot of businesses. The CCP has heard the complaints and is acting to curb monopolistic power more than to simply control pricing. Alibaba is not the only business under the gun in this regard.

www.aljazeera.com/economy/2021/1/26/chinas-big-tech-clampdown-why-some-businesses-stand-to-benefit

I wouldn't be surprised if some form of breakup wasn't required in the future. It could actually turn out profitable if they were forced / allowed to IPO a few businesses.

Jack Ma should probably stop thinking he can shoot his mouth off like Elon Musk.

 

Indeed, Alibaba was a great stock to own while they were able to increase Take percent by 80%, resulting in growing revenues by 80%.

My guess is that that given CCP is watching and given their public promise, they won't be able to increase take percent anymore above 4.5%.  I think they will probably decrease just a little to pacify CCP and merchants and to be able to say that they have honored their word.  Some of that decrease will be offset by revenue from other sources, and maybe a slight increase in GMV despite the competition. 

That said, I think market will be shocked if Alibaba announces flat or lower revenue, or even just a tiny bit growth.  I don't think market is realizing that possibility.  I think Mr. Market is still thinking: "oh, well, how much can the growth rate go down.  It used to be 35%.  Even if they lower the take rate from 4.5% to 2%, maybe growth rate will go down to 32.5%.  Let me just add some margin of safety, and round it down to 30% growth. So, its ok to pay P/E of 27-30 for this high growth stock.  So much cheaper than Amazon.  I missed the boat on Amazon and Google.  Now is my chance.  Now that Munger owns it, it is a no-brainer."

I think folks are not internalizing that take rate percent going up 80% in the past resulted in 80% growth in revenues, and that if that stops, you say goodbye to that portion of growth, and if take percent goes down even a little, revenues will go down by the percent that take rate percent goes down by, e.g. going from 4.5% to 2% take rate is 55% drop in revenues, of course offset by other sources and GMV increase in a competitive environment.   I'm not saying we are going to go from 4.5% to 2%.  I'm saying market is not even prepared for it to go from 4.5% to 4%, that is 12% reduction in Commission+CMR revenues, offset by GMV increase.  Actually, market is not even prepared for it to stay flat at 4.5%, i.e. no growth in Commission+CMR revenues, offset by GMV increase.

Regarding Munger's purchases at around current prices, we have to remember they came before this ruling. 

Mr. Market may not realize until the results start showing through.  It will take until August for current quarter's revenues to show through, and November for next quarter's revenues. 

Imagine the shock if the media headlines come out: "Alibaba revenue flat", or "Alibaba revenue shrinks" or even "Alibaba revenue growth slowed drastically."

Edited April 14, 2021 by LearningMachine

[Jurgis]

@LearningMachine: BABA has increased revenues ~10x since 2014 when they started to raise the take rate. Even if we assume that all the revenue comes from the take rate and we reduce the current revenue by 1.8, then still BABA would have increased the revenue ~5x since 2014. That's about 27% annual growth rate without take increase (vs 46% with take increase). Do you think BABA cannot show 20-27% growth rate without take increase or with slight decrease this year?

Another way to look at this, which is closer to what you suggest: 80% take rate rise from 2014 corresponds to 10% annual take rate rise. Last year BABA revenues grew about 27%. Assuming that there was 10% take rate growth last year and this year take rate is -10%, then we get something closer to your expectations: that growth will be 17% at flat take rate and only 7% at -10% take rate drop. This still assumes that 100% of BABA revenues comes from take rate. What percentage of the revenues really come from the take rate? Do you know?

[LearningMachine]

1 hour ago, Jurgis said:

@LearningMachine: BABA has increased revenues ~10x since 2014 when they started to raise the take rate. Even if we assume that all the revenue comes from the take rate and we reduce the current revenue by 1.8, then still BABA would have increased the revenue ~5x since 2014. That's about 27% annual growth rate without take increase (vs 46% with take increase). Do you think BABA cannot show 20-27% growth rate without take increase or with slight decrease this year?

Another way to look at this, which is closer to what you suggest: 80% take rate rise from 2014 corresponds to 10% annual take rate rise. Last year BABA revenues grew about 27%. Assuming that there was 10% take rate growth last year and this year take rate is -10%, then we get something closer to your expectations: that growth will be 17% at flat take rate and only 7% at -10% take rate drop. This still assumes that 100% of BABA revenues comes from take rate. What percentage of the revenues really come from the take rate? Do you know?

@Jurgis, good points. 

Revenues from take rate were about 47% as of LTM ended June 2020.   However, they are a bigger part of if not almost the entire income-producing source because almost all other sources are still working towards profitability.

Also, GMV is not going to grow as much as it did in early stages, especially with competitive landscape now and close to saturation they've already reached with Taobao, Alibaba.com and 1688.com.

My overall point is that I don't think market has digested the repercussions on growth rate of what was announced on Monday.

 

Edited April 14, 2021 by LearningMachine

[Spekulatius]

Yet again we learn to buy the dip with big tech. Scary headlines make great buying opportunities. These companies are tremendously resilient and hard to kill. Regulation hits the bigger guys first, but often the smaller guys more in the long run. Alibaba could be different, but I think it is the same. We have seen this movie many times and this one looks like a rerun.

 

First time?

Edited April 14, 2021 by Spekulatius

[Fitz]

Addressing the GMV, Alibaba is currently around 1 trillion USD in GMV and planning on hitting 2 trillion by 2024. Lowering the take rate would benefit their customers and likely speed that number in anything. 

Will be interesting to see what the reduction to the take rate is, if commissions were forced to be a fixed lower amount it wouldn't cripple the business. I think they could offer it for free and still have a wonderful business. They could exclusively move into advertising revenue in the e commerce side, when 2 trillion or more is moving through your platform there are a lot of ways you can make small % add up to enormous numbers! They would look like google at the end of that road, and would still have enormous margins.

With the additional GMV increase it will likely be powered by Alibaba Cloud. 

[LearningMachine]

47 minutes ago, Fitz said:

Addressing the GMV, Alibaba is currently around 1 trillion USD in GMV and planning on hitting 2 trillion by 2024. 

I remember seeing that claim of 2024 goal at one point too, but can't find it anymore.  Would it be possible to share the link? 

In the Sep 30, 2020 Investor Day materials, I see they have a 2036 goal around # of consumers, job creation, & SMEs, but not a 2024 goal anymore. Please see  https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_AlibabaDigital.pdf.

Currently, they claim 18% share of all retail sales in China, including offline and online.  Doubling that now wouldn't be as easy as it was to double from 9% to 18%, especially with competitors like PinDuoDuo grabbing share now, and now loss of ability to get exclusivity from merchants with the ruling. 

 

Edited April 14, 2021 by LearningMachine

[Fitz]

Its in the 2020 annual report. Don't have it up on my phone but page 14 or so “Alibaba by the number.” Growing the customer base will be a smaller part of the doubling of GMV going forward. The average annual spend per user increasing is how they see a lot of it happening. As the customer’s time in the platform matures their spend goes up significantly. 

[LearningMachine]

2 hours ago, Fitz said:

Its in the 2020 annual report. Don't have it up on my phone but page 14 or so “Alibaba by the number.” Growing the customer base will be a smaller part of the doubling of GMV going forward. The average annual spend per user increasing is how they see a lot of it happening. As the customer’s time in the platform matures their spend goes up significantly. 

Thanks Fitz.  I couldn't find the 2024 goal at Page 14 of the 2020 annual report.

I do see the 2024 goal at page 3:

Source:https://doc.irasia.com/listco/hk/alibabagroup/annual/2020/ar2020.pdf

 

In their September 2020 deck, slide 10, they claimed RMB 7.3 trillion GMV for LTM ended June 2020.  Please see https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_FinancialInvestmentPerspectives.pdf.

 

Going from RMB 7.3 trillion to RMB 10 trillion in four years is GMV growth of 8% per year.  Let's assume they can hit this even though they have now lost ability to ask for exclusivity.

Now, if they have to reduce take rate from 4.5% to 4.0%, that is about 11.1% reduction in Commission+CMR revenue.  Offsetting that by 8% growth in GMV brings it up to about negative 3% growth in this profitable part of the business.  Of course, they might not reduce take rate that much, and just reduce a little that can be offset by GMV growth, which will keep revenue from this part of the business flat overall. Of course, there will be revenue coming from other sources also, but those are not profitable yet, which means earnings wouldn't grow.  I understand take rate reduction hopefully wouldn't be an ongoing thing, but I think market is not prepared for low growth numbers like these. 

Another thing I find odd is why did they have to dilute by 3.8% with the Hong Kong listing to be able to invest in other businesses that are not yet profitable.  Why couldn't they use the cash they claim to be earning from the profitable business to invest. 

 

Edited April 14, 2021 by LearningMachine

[Moogs]

A bet on BABA is also a bet on the chinese retail sector as they are becoming more and more industrialized. A number I often see thrown around is a market CAGR of 10% so that's a growth of 46% in 4 years without gaining market share. Still ways to go but it helps quite a bit.

 

Edited April 14, 2021 by Moogs

[Fitz]

3 hours ago, LearningMachine said:

Thanks Fitz.  I couldn't find the 2024 goal at Page 14 of the 2020 annual report.

I do see the 2024 goal at page 3:

Source:https://doc.irasia.com/listco/hk/alibabagroup/annual/2020/ar2020.pdf

 

In their September 2020 deck, slide 10, they claimed RMB 7.3 trillion GMV for LTM ended June 2020.  Please see https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_FinancialInvestmentPerspectives.pdf.

 

Going from RMB 7.3 trillion to RMB 10 trillion in four years is GMV growth of 8% per year.  Let's assume they can hit this even though they have now lost ability to ask for exclusivity.

Now, if they have to reduce take rate from 4.5% to 4.0%, that is about 11.1% reduction in Commission+CMR revenue.  Offsetting that by 8% growth in GMV brings it up to about negative 3% growth in this profitable part of the business.  Of course, they might not reduce take rate that much, and just reduce a little that can be offset by GMV growth, which will keep revenue from this part of the business flat overall. Of course, there will be revenue coming from other sources also, but those are not profitable yet, which means earnings wouldn't grow.  I understand take rate reduction hopefully wouldn't be an ongoing thing, but I think market is not prepared for low growth numbers like these. 

Another thing I find odd is why did they have to dilute by 3.8% with the Hong Kong listing to be able to invest in other businesses that are not yet profitable.  Why couldn't they use the cash they claim to be earning from the profitable business to invest. 

 

LM - 

You're correct, it will be hard to find because its not in there! I should leave the speaking of precise numbers off the cuff to Buffett. I think I transposed the 2b customers in 2036 to the GMV. 

 

I wonder how much the HK listing was also driven by the hostility toward Chinese companies from the west, and the threat of de-listing that has been present the past few years. But it is interesting they wouldn't use cash on hand. 

[LearningMachine]

39 minutes ago, Fitz said:

LM - 

You're correct, it will be hard to find because its not in there! I should leave the speaking of precise numbers off the cuff to Buffett. I think I transposed the 2b customers in 2036 to the GMV. 

 

I wonder how much the HK listing was also driven by the hostility toward Chinese companies from the west, and the threat of de-listing that has been present the past few years. But it is interesting they wouldn't use cash on hand. 

Thanks Fritz for clarifying :-).

I agree HK listing itself was in the best interest of shareholders.

I also agree that they didn't have to take the opportunity to dilute so much at the same time because they claim to have plenty cash on hand and making cash every year. It doesn't smell right. 

[DooDiligence]

Here's a good push-back substack for Alibaba pom-pom wavers (like me).

"...the competitive environment for Alibaba is fierce, and there are few credible growth opportunities for Alibaba to access. It still has a strong data moat (tweet below) but its days as a hyper-growth stock are over."

https://lillianli.substack.com/p/alibaba-from-growth-to-value

[Lakesider]

1 minute ago, DooDiligence said:

Here's a good push-back substack for Alibaba pom-pom wavers (like me).

"...the competitive environment for Alibaba is fierce, and there are few credible growth opportunities for Alibaba to access. It still has a strong data moat (tweet below) but its days as a hyper-growth stock are over."

https://lillianli.substack.com/p/alibaba-from-growth-to-value

Reminds me about comments about amazon years ago. 

[DooDiligence]

1 hour ago, Lakesider said:

Reminds me about comments about amazon years ago. 

My thoughts exactly. Pulling the rug out from under Alibaba is not going to be easy.

[Spekulatius]

1 hour ago, DooDiligence said:

Here's a good push-back substack for Alibaba pom-pom wavers (like me).

"...the competitive environment for Alibaba is fierce, and there are few credible growth opportunities for Alibaba to access. It still has a strong data moat (tweet below) but its days as a hyper-growth stock are over."

https://lillianli.substack.com/p/alibaba-from-growth-to-value

Lillian went as far as stating that $BABA is a boomer value stock, which of course makes it an autobuy.

[Krapdivad]

On 4/10/2018 at 4:18 PM, Shooter MacGavin said:

How do you guys get comfortable investing in BABA or Tencent or others given the legally unenforceable rights to assets?  I'm not asking as a bear or short or anything.  I'd love to own these companies but I just worry about this. 

 

I remember when Jack Ma sort of seized Alipay from Yahoo! and they were basically helpless.  In fact I had a conversation with CFO at the time about this. And that has kind of been seared in my mind.  Also all these stories from Bill Browder with his experience in Russia and whatever (although a very different govt and situation, but still lack of enforceable rights for foreigners). What gives you comfort or how do you think about the risk?

 

 

 

 

 

 

I'm getting more comfortable investing in China as more of the investing "gurus" are becoming more outspoken about the opportunities in China. 

Charlie Munger, Li Lu, Ray Dalio, and Howard Marks all have spoken about the opportunities for investors as China becomes the world's largest economy. They all point to favorably changing regulations over time that will bring more confidence to global investors. This provides an opportunity for mature US investors to take advantage of the inefficiencies still present in the younger Chinese markets. 

China was always worried about money flowing out of the country, and it seems like they've realized that bringing in foreign investors will be beneficial for the country's long term prosperity. As China is going from an import/export economy over to a consumer driven economy, entrepreneurial companies are playing a more important role. The government is recoginizing this and reforming the IPO model from an approval based to a registration based model according to Li Lu. 

I got all of these insights from Li Lu's talk the other day, and more recently from the Howard Marks interview.

Li Lu: https://youtu.be/FiHrWy2jGbA
Howard Marks:https://fb.watch/4U6RvgdJzJ/

[LearningMachine]

Thanks @Krapdivad for sharing.  

 

To play devil's advocate, the smartest guy in the room at Alibaba, who happens to have built a net worth higher than Charlie Munger, Li Lu and Howard Marks combined, who happens to have a better view and understanding of the situation than anyone else because of his unique background, is getting out of Alibaba.

Almost doing a pump and dump.  At the Monday call, it was interesting to listen how Maggie Wu was trying to be honest about impact to both "top line" and "bottom line" going forward with "Billions of RMB" that will be taken going forward to help the merchants. 

Joe Tsai, on the other hand, was trying to cover it by saying this matter is "behind us", while dumping in the market :-).

Edited April 16, 2021 by LearningMachine

[MattR]

23 hours ago, LearningMachine said:

Thanks @Krapdivad for sharing.  

 

To play devil's advocate, the smartest guy in the room at Alibaba, who happens to have built a net worth higher than Charlie Munger, Li Lu and Howard Marks combined, who happens to have a better view and understanding of the situation than anyone else because of his unique background, is getting out of Alibaba.

Almost doing a pump and dump.  At the Monday call, it was interesting to listen how Maggie Wu was trying to be honest about impact to both "top line" and "bottom line" going forward with "Billions of RMB" that will be taken going forward to help the merchants. 

Joe Tsai, on the other hand, was trying to cover it by saying this matter is "behind us", while dumping in the market :-).

Seems like he is selling similar shares yearly. Not suprising, most executives do it and do it on a regular basis. It get more worry some when he would do it in much more often. Seems he sells it just before Chinese New Year

[Jurgis]

My predictions about BABA:

https://finpredictions.com/questions/what-will-be-alibabas-revenue-in-the-first-quarter-of-fiscal-2022/#156

https://finpredictions.com/questions/what-will-be-alibabas-revenue-growth-in-fiscal-2022/#155

https://finpredictions.com/questions/what-will-be-alibaba-stock-price-june-30th-2021/#161 - it seems I was too optimistic earlier.

Not strong convictions. I may change them any time.

[Lakesider]

https://www.reuters.com/technology/exclusive-chinas-ant-explores-ways-jack-ma-exit-beijing-piles-pressure-sources-2021-04-17/

[DooDiligence]

1 hour ago, Lakesider said:

https://www.reuters.com/technology/exclusive-chinas-ant-explores-ways-jack-ma-exit-beijing-piles-pressure-sources-2021-04-17/

 

"But the second source also with company connections said that during discussions with regulators, Ma was told that he would not be allowed to sell his stake to any entity or individual close to him, and would instead have to exit completely. Another option would be to transfer his stake to a Chinese investor affiliated with the state, the source said."

[Lakesider]

14 minutes ago, DooDiligence said:

 

"But the second source also with company connections said that during discussions with regulators, Ma was told that he would not be allowed to sell his stake to any entity or individual close to him, and would instead have to exit completely. Another option would be to transfer his stake to a Chinese investor affiliated with the state, the source said."

I think this is what we were all expecting anyway? I think ANT will end up being a funnel of business to state owned banks. 

Edited April 17, 2021 by Lakesider

[Baklava]

I thought this might be interesting for the ones invested in Alibaba. 

https://www.longriverinv.com/blog/alibaba-at-a-crossroads?ss_source=sscampaigns&ss_campaign_id=6076a8083e52904f37c87861&ss_email_id=6076a91c767aae49e8791a1a&ss_campaign_name=Alibaba%3A++At+a+Crossroads&ss_campaign_sent_date=2021-04-14T08%3A34%3A54Z

[DooDiligence]

25 minutes ago, Baklava said:

I thought this might be interesting for the ones invested in Alibaba. 

https://www.longriverinv.com/blog/alibaba-at-a-crossroads?ss_source=sscampaigns&ss_campaign_id=6076a8083e52904f37c87861&ss_email_id=6076a91c767aae49e8791a1a&ss_campaign_name=Alibaba%3A++At+a+Crossroads&ss_campaign_sent_date=2021-04-14T08%3A34%3A54Z

Love the Longriver meme.

Edited April 18, 2021 by DooDiligence