INTERNET: Alibaba Tries Domestic Credit, Global Platform
Bottom line: Alibaba’s new online credit product and global shopping mall look like smart new initiatives that could help maintain its strong growth to justify its high valuation.
It’s been quite a while since I’ve written about the actual business of e-commerce giant Alibaba (NYSE: BABA), which has captured global headlines for much of the last 4 months for mostly financial reasons after its record-breaking IPO in September. So on that note, I was quite happy to finally read new headlines on some smart-looking moves the company is making to justify its sky-high valuation, which is built on expectation for continuing super-charged growth.
One of those initiatives has Alibaba’s finance unit rolling out a product that looks like a variation of traditional cards, and is aimed at getting shoppers to spend even more on its popular e-commerce platforms. The other is an update on its new global e-commerce initiative that looks like it’s gaining some strong early momentum, at least according to the company’s own telling of the story.
Alibaba is currently China’s most valuable Internet company, worth around $260 billion, and its shares now trade at a rich premium of around 50 times its estimated earnings for 2015. Much of that premium is built on expectation for big growth, similar to the 54 percent revenue growth it posted in its maiden earnings report released in November. (previous post) But maintaining such growth will become increasingly difficult as revenue, which totaled $2.7 billion in the third quarter, gets bigger.
Alibaba has made a number of strategic acquisitions over the past year, some of which may start making contributions over the next 2-3 years. But many of those look relatively small, and the company will have to rely mostly on new developments for its core e-commerce-related businesses and services for much of the new near-term growth. On that note, a new credit product from its financial services unit looks intriguing and well-designed to help Alibaba grow while protecting it from the risks associated with such financial products.
According to the latest reports, Alibaba’s affiliated financial unit, Ant Financial, has just launched a new product called huabei, whose name appropriately translates to “just spend”. Details of the product are spelled out in an article on it and I won’t repeat them here. (English article) But the bottom line is that huabei offers loans of up to 30,000 yuan ($4,800) to help shoppers purchase their products and pay for them later. The product looks like it’s still in beta testing, and no formal launch has been announced yet.
I like this particular idea because it will help to fuel Alibaba’s online sales while protecting it from the inevitable risks associated with offering so much credit to its customers. That’s because Ant Financial, which also owns Alibaba’s popular Alipay electronic payments service, is separate from the New York-listed Alibaba. The split occurred several years ago and happened for legal reasons. But the bottom line is that the listed Alibaba can now benefit from supporting services supplied by Ant Financial and Alipay, without having to shoulder any of the risks associated with providing financial services.
Next let’s look quickly at the other news bit, which is an update on Alibaba’s Tmall Global, an international version of its core Tmall online shopping mall in China. The company says 5,400 foreign brands from 25 countries are setting up shops on Tmall Global, including some of Europe’s leading supermarkets. (English article) A quick visit shows the actual site is very much a work in progress, though presumably it will become more functional in the year ahead.
Again, I won’t go into too much detail here, since this business update is clearly an effort to tell investors why they should continue to buy Alibaba’s stock. But from a purely market-oriented perspective, there’s no reason why Alibaba shouldn’t be able to find a place in the market alongside the handful of other global e-commerce firms like US leaders Amazon (Nasdaq: AMZN) and eBay (Nasdaq: EBAY), and Japan’s Rakuten (Osaka: 4755). We’ll have to wait until Alibaba starts generating some real sales for this new global shopping mall to see how it’s really doing, but for now at least the initiative seems to be getting off to a positive start.
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