Alibaba Group Holdings Ltd. (BABA) is a holding company legally domiciled in the Cayman Islands but which conducts its e-commerce businesses through its Chinese subsidiaries and variable interest entities (VIEs). Its primary business is to offer a digital marketplace where consumers and merchants can connect and buy and sell from each other. Alibaba operates its business through four primary segments, led by its giant e-commerce operations.
Chief among its competitors are other established Chinese e-commerce and Internet companies, such as Tencent Holdings Ltd., as well as global and regional e-commerce companies, such as Amazon.com Inc. (AMZN). Since Alibaba also operates in the cloud-computing business and digital-media and digital-entertainment businesses, it competes with companies specializing in those markets as well.
- Alibaba provides digital marketplaces for merchants and consumers.
- Alibaba's largest business is its core e-commerce operations, but cloud computing is growing the fastest.
- Alibaba aims to be a leader in the development of the infrastructure of commerce.
- In Alibaba's latest five-year plan, it announced a goal of achieving billion annual active consumers in its China consumer business by the end of fiscal year 2024.
Alibaba files financial statements with the U.S. Securities and Exchange Commission (SEC) and does so in accordance with generally accepted accounting principles (GAAP). The company follows a reporting schedule where the end of its fiscal year (FY) occurs at the end of March. Alibaba also reports certain non-GAAP financial measures, such as adjusted earnings before interest, taxes, amortization, and depreciation (EBITDA), and adjusted EBITA, which refers to earnings before interest, taxes, and amortization. Although Alibaba's reporting currency is the Renminbi, the company provides conversions into U.S. dollars, which are used in this story.
The company's annual revenue rose 50.6% to $56.2 billion during its 2019 fiscal year, which ended March 31, 2019. That rate of growth was slower than the 58.1% annual rate posted for its 2018 FY. Judging by the first two quarters of its 2020 FY, the trend of decelerating revenue growth appears to be continuing. Revenue for the six months ended September 30, 2019, rose 40.9% YOY.
Annual net income for Alibaba's 2019 FY rose 30.6% to $12.0 billion, which like the company's revenue growth, also slowed compared to the previous year. Alibaba posted annual net-income growth of 49.0% during its 2018 FY. Through the first six months of its 2020 FY, net income rose 247.1% YOY. due to a significant one-time gain upon Alibaba's acquiring a 33% equity interest in Ant Financial during the second quarter.
Alibaba’s Business Segments
Alibaba monetizes its services through four main business segments that it formally names as: core commerce, cloud computing, digital media and entertainment, and innovation initiatives. The company provides segment break downs of revenue and adjusted EBITA, the latter of which was reported as $15.9 billion for the company for the 2019 FY.
Alibaba's core commerce segment is comprised of its various digital retail and wholesale marketplaces, as well as logistics and local consumer services. The company generates revenue from merchants through the sale of a variety of marketing services, membership fees, customer management services, product sales, commissions on transactions, and software service fees. The company generates revenue from local consumers through platform commissions and on-demand delivery service fees.
Core commerce is Alibaba's largest source of revenue at $48.2 billion, or 85.8% of the company's total revenue, as of the end of its 2019 FY. Over that past two years, that revenue share has increased by 1.2 percentage points from 84.6% reported at the end of Alibaba's 2017 FY.
In terms of income measures, the core commerce segment represents 100.0% of the company's adjusted EBITA, which grew 19.3% to $20.3 billion during the 2019 FY. Losses in Alibaba's other business segments partly account for the higher-reported figure in the core commerce segment than in adjusted EBITA for the company as a whole.
Alibaba Cloud provides enterprise customers with a complete suite of cloud services, including database, storage, management and application services, big data analytics, a machine-learning platform, and other services. The company's cloud computing segment generates revenue from enterprise customers based on the duration and specific usage of the services.
Cloud computing is Alibaba's second largest source of revenue at $3.7 billion, or 6.6% of total revenue, as of the end of the 2019 FY. The segment is also the company's fastest-growing source of revenue. Annual revenue grew 84.5% over the 2019 FY and the segment has increased its share of total revenue by 2.4 percentage points over the past two years. Alibaba reported a loss in adjusted EBITA of $0.2 billion for its cloud computing segment for the 2019 FY.
Digital Media and Entertainment
Alibaba's digital media and entertainment segment exists as part of the company's strategy to capture revenue from consumption beyond its core commerce businesses. The segment generates revenue primarily from customer management services and membership subscription fees.
Digital media and entertainment is Alibaba's third largest source of revenue at $3.6 billion, or 6.4% of total revenue, as of the end of the 2019 FY. The segment is also Alibaba's slowest-growing segment and its share of overall revenue has decreased almost 3 full percentage points over the past two years from 9.3% at the end of the 2017 FY. Alibaba reported a $2.4 billion loss in adjusted EBITA during its 2019 FY.
Alibaba's innovation initiatives segment aims to innovate and develop new services and products that can meet the needs of its customers. Past innovations include digital-navigation app Amap and network-communication app DingTalk. The segment generates revenue primarily through services fees and product sales to enterprise customers and consumers.
Innovation initiatives comprises the smallest share of Alibaba's revenue at $0.7 billion, or 1.2% of total revenue, as of the end of the 2019 FY. The segment posted annual revenue growth of 41.7% during the 2019 FY, but its share of total revenue has shrunk by a little over half of a percentage point over the past two years. Alibaba posted a $0.9 billion loss in adjusted EBITA for the 2019 FY.
Alibaba's Recent Developments
Alibaba announced in late September its goal of reaching one billion annual active consumers in its China consumer business by the end of its 2024 FY, as part of its latest five-year plan. As of that announcement, the company was just 270-million annual active consumers short of its goal.