Alibaba Will be Bigger than Amazon
Alibaba’s core business is so healthy it can swallow others now.
While Amazon has an incredible product in AWS and also with Alexa, the evidence is showing that Alibaba will follow Amazon and eventually out-size it.
Even amidst a trade war that’s challenging China’s 6% growth levels, Alibaba, the Chinese Mega E-commerce retailer, is thriving.
Alibaba, I think, will out-hustle Google Cloud and become the 3rd horseman in the Cloud wars. Its cloud business grew 66% (August 2019) to more than $1.1 billion, or a run rate surpassing $4 billion.
For technology companies, the Cloud is a more important cash cow than digital advertising because it leads to opportunities in AI. This is how Amazon now rivals Google and has left Microsoft and Apple in the dust, with consumer-AI with Alexa nearly everywhere in our smart homes.
So how healthy is Alibaba’s growth, you may ask? Its revenue grew 42% on the year to hit RMB 114.9 billion in the reporting period, while net profit more than doubled to RMB 21.2 billion. Those aren’t ordinary numbers for a company its size.
If Baidu faces competition, even as its smart speakers are selling fast, Alibaba has such a great business model of diversification it can literally do anything at this point to scale further.
We are talking about nearly $17 billion in revenue ($16.74 billion). Alibaba is considering a $2 billion acquisition of e-commerce rival NetEase Kaola. Alibaba’s growth in the Cloud in the 2020s will likely make it far more profitable than Amazon, which will have to continue to compete with Microsoft Azure and Google Cloud to maintain its dominance.
How ambitious is Alibaba to compete with Amazon in the Cloud? Alibaba Cloud’s president Simon Hu boasted to Reuters that his company would overtake Amazon in four years. That might be unlikely, but within the next decade, this is nearly a certainty.
Alibaba’s core commerce revenue grew 44% annually to 99.5 billion RMB ($14.1 billion) and accounted for 87% of its top line. Essentially what this means is Alibaba’s core business is so strong and robust, (like Huawei’s), that trade wars don't stop its progress. In fact, Alibaba can, like Amazon, begin to disrupt other verticals.
While Amazon is getting into advertising and AI in a way that’s superior to Alibaba, Alibaba lives in a bigger market that can eventually dominate all of Asia. Even as Salesforce partners with them in China, Alibaba’s potential as a state-guided entity basically knows no boundaries. In my opinion, Huawei-Alibaba-ByteDance is the New Trinity of Chinese big tech. Forget BAT, and hello HAB.
The second tier of China’s tech dynasty would likely be BMTJD, which would stand for Baidu, Meituan, Tencent, JD and Didi respectively. Although these cannot scale, I believe, to the degree the 1st tier can. Either way, Alibaba’s unique position is that its Cloud growth will enable it to do great things in other areas.
In Cloud penetration in Asia, however, Alibaba still has a ways to go. Alibaba was first in China (Q1), but fourth in the region outside of China, with the market’s Big 3 — Amazon, Microsoft and Google — coming in ahead of it. I expect this to gradually change as China becomes more influential, broadly speaking, in the Cloud, AI and B2B in Asia in general. In 2019, we’ve seen China become even more influential, for example, in places like India.
While Alibaba may appear seamlessly immune to trade war challenges, that’s not actually the case. Alibaba’s revenue, according to Refinitiv data, was still only 42% year-on-year better, slower than the more than 61% year-on-year revenue growth seen in the same period last year.
Alibaba-backed Tmall International made up 32.3% of China’s cross-border e-commerce market in the first quarter this year, followed by NetEase Kaola with 24.8%, according to report from research institute Analysys. Now if Alibaba is able to acquire NetEase Kaola, it will be huge.
Physical goods general merchandise volume (which includes the value of all goods sold across the platform) rose 34% annually at Tmall, its main business-to-consumer marketplace. Alibaba already has incredible scale.
Alibaba could pay as much as $2 billion to complete the takeover of Kaola, Sina Finance reported. Other media sources have suggested that NetEase would be interested in talks with companies like Alibaba and Pinduoduo. If Pinduoduo (PDD) were able to get it, that would be interesting and secure their position as the 3rd player behind Alibaba and JD.com.
Alibaba finished the quarter with 755 million mobile monthly active users across its Chinese retail marketplaces, marking an increase of 34 million from the fourth quarter. That’s the kind of scale that realistically Amazon can only dream of, even with its highly profitable Prime subscription service.
When Alibaba begins to focus more in the Cloud, B2B and in AI, it will realistically catch Amazon without much problem. This is because China is the most important marketplace in the world and the heir apparent in all of Asia.
Amazon’s stock price is more than 10x that of Alibaba today in 2019. But nothing stays the same forever. My bet is on Alibaba for global dominance in the decades ahead due to its unique position and emerging power in the Cloud.
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