Alibaba’s (NYSE: BABA) food delivery platform, Ele.me, has shown rapid growth in the past few quarters. The recent quarterly report of its rival Meituan indicates signs of lower price wars with Ele.me. Meituan’s quarterly loss in the recent quarter was $207 million, less than half the consensus estimate by analysts, while the growth rate was 70%. Ele.me and Meituan have formed a duopoly in food delivery and other consumer services in China.
After the initial heavy discounting strategy, both these companies are looking to reduce their losses. This should be a significant tailwind for long term margins and Alibaba stock.
Ele.me had a revenue share of 5% in the latest quarterly results of Alibaba with revenue of $785 million. This share can increase to 10%-15% by the next fiscal year due to faster growth in this segment. Improvement in margins in Ele.me should increase the overall revenue growth of Alibaba. This will increase its EBITDA significantly. Investors should closely look at the future growth potential of this service.
Duopoly Shows Lower Competition
Food delivery is another segment where Alibaba and Tencent are competing. Meituan is backed by Tencent and was listed in late 2018. After the listing, Meituan saw significant stock decline, however, it has made some recovery in the last few weeks. One of the reasons for more positive sentiment towards Meituan is the lower discounts offered by the company to gain market share.
In the initial growth phase, both Meituan and Ele.me relied on heavy discounting to attract restaurants and customers to their services. Both these competitors are now moving away from discounts. Massive discount led to big losses in Ele.me and also hurt Alibaba stock.
but an easing of that headwind has reduced the losses in Meituan. A similar trend should be shown by Ele.me in the next few quarters. Alibaba has integrated Ele.me with Koubei to form a separate segment called “Local Consumer Services.”
Fig: Ele.me revenues are shown within local consumer services division. Source: Alibaba Filings
The market share of Meituan is still higher than Ele.me. Meituan’s market share is 63.4% according to Trustdata.
Ele.me, meanwhile, has integrated its services within Alibaba’s Taobao and Tmall apps. In the recent quarterly report, Alibaba mentioned that 30% of the customers on Ele.me come through these apps. This is a big positive, and better integration of Ele.me with other apps within Alibaba’s ecosystem will improve the moat of these services.
Future Direction for BABA Stock
The delivery market is far from saturation in China. We should continue to see more services added to the delivery platforms, increasing the growth potential of Ele.me and also helping build a better last-mile logistics network. Ele.me is in discussion to add Luckin Coffee (NASDAQ:LK) to its delivery network. Luckin is the main rival of Starbucks in China and was valued at $4 billion in the recent IPO.
Alibaba is rapidly building its grocery store format called Fresh Hippo. Recently it opened its 150th store and has plans to ramp up the store openings in many cities. The delivery network of Ele.me would be a big boost to this grocery business. It should be noted that Ele.me’s delivery network is much more closely integrated with Alibaba’s ecosystem compared to Meituan’s integration. Hence, Alibaba has a number of options to monetize every additional member on Ele.me.
Alibaba has also been replicating Ele.me’s model in other international regions. One of the faster-growing regions for delivery services is India where Alibaba has invested in Zomato, a leading player. Last year, Ant Financial invested over $400 million in the company. In the recent annual report, Zomato mentioned a 3x jump in revenue. Zomato is competing against Swiggy in this region, which is backed by Tencent (OTCMKTS:TCEHY).
We should see a similar trend in delivery services in other regions of South Asia and Southeast Asia. This opens a greater opportunity for Alibaba. A healthy margin by Ele.me in China should help in improving the future expectations from these services in other international regions. This should lead to better sentiment towards Alibaba stock as the company expands its international business.
Path to IPO
Tencent has been quite eager to go to the IPO route for its different services. In 2018, we saw IPO of Meituan and Tencent Music, and we could see more.
Alibaba has not taken this path till now. But it is likely that Alibaba will also try out this approach, as it will be able to invest in other growth segments. Meituan has a valuation of $40 billion while Tencent Music has a valuation of over $20 billion.
Alibaba can take IPO option for Ele.me and Youku (its digital media segment) to get a better standalone valuation for these businesses. Reuters has reported that Alibaba is looking for a secondary listing of $20 billion in Hong Kong. This option should also help in getting a better valuation for Alibaba stock. Currently, Tencent, which is listed in Hong Kong, is valued at 24 times its forward earnings. Alibaba is trading at around the same level, but Alibaba’s revenue growth has exceeded Tencent for the past six quarters.
In the recent quarter, Tencent reported revenue growth of only 16% compared to 39% by Alibaba after adjusting for acquired businesses.
Alibaba’s food delivery platform, Ele.me, is seeing lower price competition. The discount wars between Meituan and Ele.me have reduced considerably. This has helped Meituan post better results in the latest quarter, so Ele.me should also see an improvement in margins.
The recent revenue from this platform was $765 million with a 5% revenue share. That revenue share metrics should increase substantially as new services are added to the delivery network. Better margins and higher revenue share from Ele.me should lift the overall margins for the company and increase the bullishness towards Alibaba stock.
Alibaba is also replicating this model in other regions. This will help the company in diversifying its revenue base and also improving the growth prospects in international regions. Alibaba can use the IPO route for Ele.me which should improve the valuation for this business and allow the company to divert resources to other profitable segments like cloud.
As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.
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