Alibaba Group (BABA) was founded by Jack Ma, who remains the company’s CEO, and 17 others in 1999. At its core, the Chinese company is an ecommerce giant made up of many online platforms that offer consumer-to-consumer (C2C), business-to-consumer (B2C), and business-to-business (B2B) services. However, Alibaba is also involved in many other kinds of business.
Alibaba is often likened to Amazon (AMZN); while the two companies are similar, its important to know how they differ. Both companies are among the world’s largest, based in ecommerce and extremely diversified. But unlike Amazon, Alibaba itself is not a retailer. Instead, Alibaba’s network of interlocking platforms merely facilitate ecommerce between manufacturers, suppliers, retailers, and customers.
Alibaba is massive. By some estimates, it already controls around 80% of all online retail sales in China. In 2014, Alibaba made history with its $25 billion IPO, the highest ever. It is now one of the 10 most valuable companies in the world, the fifth largest internet company in the world, and in Jan. 2018 it became the second Asian company to be valued over $500 billion, after Tencent Holdings. On June 5th, 2019, when Alibaba released its annual report and 20-F, it had a market capitalization of $397.8 billion. The company has a current ratio of 1.3 and a return on equity (ROE) of 13.2%.
- Alibaba’s 2014 IPO was the highest at $25 billion.
- Alibaba is the fifth largest internet company in the world.
- Alibaba was the first Asian company to be valued over $400 billion and the second to be valued over $500 billion.
- Unlike Amazon, Alibaba itself is not a retailer. Instead, it provides infrastructures for ecommerce.
Alibaba's Business Model
Alibaba’s long-term goal is to supply businesses with a comprehensive, all-encompassing platform that provides all the infrastructure necessary for ecommerce. As it stands, the company makes the vast majority of its money from charging businesses to use said infrastructure. However, beyond this core, Alibaba's portfolio is extremely diversified. In addition to its ecommerce sites, the company also owns a shipping company, a messaging app, and movie studio, just to name a few.
In its filings, Alibaba splits its business up into four segments: “core commerce,” “cloud computing,” “digital media and entertainment,” and “innovation initiatives and others.” Core commerce is the company’s only profitable segment and also by far the largest. Alibaba’s net income was almost $12 billion in 2018.
According to its annual report, 85.5% of Alibaba's $56.2 billion in revenue came from what it calls “core commerce” in 2018. This dominant segment of Alibaba’s business is made up of 13 ecommerce platforms that allow manufacturers, retailers, and customers to conduct many different kinds of transactions without leaving Alibaba’s ecosystem. Alibaba profits from these platforms by charging businesses commissions per transaction, yearly subscriptions to maintain digital storefronts, or to rank higher in search results. To understand how this ecosystem works, consider the following example:
A man named John wants to buy a lawnmower, so he logs on to taobao.com—Alibaba’s retailer-to-consumer marketplace—to buy one. John pays with Alipay, Alibaba’s P2P payment service. The retailer, Jessica, bought her 1,000-lawnmower inventory on 1688.com, Alibaba’s platform that allows suppliers to sell bulk orders to individuals or other businesses. The supplier, Phil, bought his supply from a lawnmower manufacturer on tmall.com, Alibaba’s website that allows businesses to sell wholesale.
Meanwhile, Jessica has decided to expand her business. She wants to sell to individuals outside of China. To do this, she lists her lawnmowers on aliexpress.com, which is available internationally. As it turns out, Jessica’s lawnmowers are selling like hotcakes in Germany, so she decides to take a loan from Ant Financial, another Alibaba company, to expand her inventory to other lawn care products. All of these transactions have occurred within Alibaba’s ecosystem.
How much of Alibaba's revenue comes from its "core commerce."
Alibaba also offers a suite of cloud computing products like Google’s G Suite. Although these products are not yet profitable for Alibaba and made up only 5.4% of Alibaba’s revenue in 2018, they are generating fast growing revenues. This segment of Alibaba’s business has seen a compound annual growth rate (CAGR) of 104%, growing from $116.3 million in 2014 to $1.95 billion in 2018. Nonetheless, it still incurred a $450 million operating loss in 2018.
In the past ten years, Alibaba’s cloud suite has grown to become competitive with the likes of Tencent Cloud, Amazon Web Services, and even Google’s G Suite. Due to Alibaba’s long-term goal, it already has a lot of experience building digital infrastructures to support its platform businesses. So it is only natural that it has moved into cloud computing, another business based on digital infrastructures.
Digital Media & Entertainment
Alibaba has also invested heavily in digital media and entertainment companies that are seemingly unrelated to its core commerce segment. For instance, Alibaba owns the Chinese video website Youku, which is like a cross between Netflix and Youtube. It owns the South China Morning Post newspaper, offers a music service called Alibaba Music, a sports broadcaster called Alisports, and even owns a movie studio called Alibaba Pictures. These businesses make money in a variety of ways, including advertising, newspaper sales, and subscriptions. In 2018, this segment earned Alibaba $2.85 billion in revenue, which is five times what it produced in 2016. However, this business segment remains unprofitable, with $2.05 billion in losses in 2018.
Alibaba has also owned a 32% stake in Weibo, one of China’s biggest social media platforms, since 2016. This has proven a key investment for Alibaba.
Innovation, Initiatives, and Others
The smallest segment of Alibaba's business also serves as its R&D department, which is where the company groups many of its still-developing investments. Here, the company is experimenting with ventures like its own computer operating systems, a professional communication platform called DingDing that has been compared to Slack, a company called Amap that deals in ride-hailing and congestion reduction, and even AliHealth, which positions itself as a medical services and pharmaceutical ecommerce business. This segment has seen the most moderate gains, $480 million in 2018 up from $260 million in 2016.
Why Invest so Broadly?
To understand Alibaba’s larger strategy, it can be instructive to think of the company's ecommerce ecosystem as a massive digital mall. This analogy illustrates that Alibaba's "core commerce" essentially consists of leasing retail space to businesses of all kinds and sizes. Like any mall owner, Alibaba's job is simple. It must find ways to funnel customers into the mall, convince them to buy things there, and incentivize them to stay for as long as possible. Thus, Alibaba’s ancillary businesses—like video websites, social media platforms, digital wallets, etc.—all serve either as doorways into Alibaba’s mall or as attractions that make it fun and convenient to stay inside the mall for long periods of time.
Aggressive Investment in Competitive Industries
Since its inception, Alibaba has invested in 163 different companies. It is perhaps the most powerful investment firm in China, rivaled only by Tencent Holdings (TCTZF). Most of Alibaba's investments have been in Chinese companies, particularly in ecommerce and logistics. However, that doesn’t mean Alibaba’s sights are limited to the Chinese market. The company has also invested in businesses in the U.S., like the Seattle-based virtual reality (VR) company Magic Leap, the India-based digital wallet company Paytm, the Israel-based augmented reality (AR) company Lumus. Most of these investments are in cutting edge, extremely competitive industries like artificial intelligence, virtual and augmented reality, digital wallets, ecommerce, and alternative transportation solutions (like bike-sharing). Internationally, Alibaba is particularly focused on VR and AR, AI, and companies that reduce friction in ecommerce.
The only things standing in Alibaba’s way are other companies like Alibaba. Its top competitors include Tencent Holdings (TCTZF), Amazon (AMZN), Google (GOOGL), Microsoft (MSFT), and Facebook (FB). Needless to say, these companies are seriously heavy hitters. But then again, so is Alibaba.