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The Growth Story Behind Alibaba Stock Just Got Stronger

Rohit Chhatwal

Alibaba (NYSE:BABA) has delivered better revenue growth than its chief rival JD.com (NASDAQ:JD) for the past 10 quarters. The continuous outperformance by Alibaba compared to JD has shown the long-term strength of Alibaba’s business model. This should improve the bullish sentiment for BABA stock.

BABA Stock: The Growth Story Behind Alibaba Just Got Stronger

Source: Shutterstock

Analysts are also projecting much faster revenue growth by Alibaba in the next few quarters in comparison to JD. Currently, eMarketer has estimated 58.2% market share for Alibaba while JD’s share has dropped to 16.3%.

We should continue to see better performance from Alibaba in comparison to JD because of faster growth in segments like cloud computing. Alibaba has also invested heavily in international regions which should give BABA stock a better growth trajectory. If the market share decline in JD continues, it would be a much lower threat to Alibaba’s ecommerce segment.

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BABA Stock: Past Performance and Future Estimates

BABA Stock: Past Performance and Future Estimates

We can see in the above chart that BABA has been able to beat JD in terms of revenue growth for the past several quarters. The direct impact of this is that the forward revenue estimates of Alibaba have grown much faster than JD.

It should be noted that Alibaba and JD have a very different e-commerce business model. JD is very similar to Amazon (NASDAQ:AMZN) because it controls the entire logistics and warehousing of goods. This has allowed the company to have a better check on the quality of goods and also limit fake items on the platform. On the other hand, Alibaba does not own the inventory, hence its revenue base is much lower than the gross merchandise value (GMV) of the entire platform.

JD’s business model is very expensive, which can be seen in the wafer-thin margins of the company. However, Alibaba produces a ton of free cash, which the company can then invest in other segments. This allows diversification of its revenue base and gives the company a longer growth runway. Alibaba has invested massively in its cloud segment and has opened new data centers in Europe, the Middle East, South Asia, Southeast Asia and in the domestic Chinese market.

New Rivals

In the last report published by eMarketer, we can see that BABA has an overwhelming market share within China. JD has a market share of only 16.3%. However, there has been a rapid rise of a new rival. Alibaba is facing fresh competition from Pinduoduo (NASDAQ:PDD) which was started in 2015. In just three years, the company has been able to grab a decent market share. It is a group buying platform that allows buyers to get additional discounts for bulk purchases.

PDD has seen faster growth in tier 3 and 4 cities. Customers in these cities have a greater preference for discounts and social buying experience. PDD has recently raised $1.5 billion in a secondary offering. This provides the company greater firepower to compete against Alibaba. Most of these additional funds will be invested in improving logistics and attracting new customers. In the last SEC filing, PDD claimed to have 232 million monthly active users. Alibaba has 699 million MAUs. PDD has the complete backing of Tencent (OTCMKTS:TCEHY), which should allow the company to add new features and take advantage of Tencent’s ecosystem.

Future Growth Estimates

Despite new rivals, BABA should be able to deliver decent growth in its core commerce retail for the near term. At the same time, growth in international regions, cloud segment and digital media provide the ability to diversify the revenue.

Alibaba stock revenue chart

The forward revenue estimates of Alibaba have been increasing rapidly. The revenue estimate for the two fiscal years ahead is close to $100 billion. Alibaba has closed the revenue gap with JD. Alibaba’s Ele.me is adding new services to the last mile delivery platform. It is in direct competition with Tencent’s Meituan, which has a market cap of $40 billion.

Alibaba stock should see bullish sentiment due to strong growth in its subscription business on its Youku platform. Eventually, we could see Alibaba’s subscription program become a big revenue generator for the company. Amazon’s (NASDAQ:AMZN) subscription segment revenue in the trailing twelve months was $16 billion. Alibaba should be able to add more value to its subscription service by investment in content and delivery.

The cloud segment showed revenue of $962 million in the recent quarterly earnings with a growth rate of 84%. At the current growth rate, this segment will be hitting the $10 billion revenue level on an annualized basis by next year.

Alibaba has a number of growth options that should allow the company to deliver rapid growth in the top line over the next few quarters. This should help Alibaba stock in the near term.

Bigger market share within Chinese e-commerce will have a halo effect on other services offered by the company. Investors should look at the long-term market share trend of Alibaba to gauge the future growth potential in BABA stock.

Bottom Line on Alibaba Stock

Alibaba has been able to deliver better revenue growth than its chief rival JD. This has increased the e-commerce market share of the company in China. It has helped in improving the ecosystem of new services, which are built around Alibaba’s Taobao and Tmall platform. Having a high market share improves the pricing power of the company, which should help in expanding the margins.

New rivals like Pinduoduo might take some of the market share lost by JD. However, Alibaba has proved that its business model is more successful in the domestic Chinese market. New growth segments like cloud and digital media should allow the company to deliver high growth rates in the near term.

As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.

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