Alibaba stock has surged 42 percent this year

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The big picture: Alibaba’s share price has climbed by 42 percent this year, bringing its valuation to $800 billion. The growth has boosted investor confidence in the company, which is projected to climb to even greater heights in the mid to long term. With over 750 million users in China, will it be able to sustain this growth rate?

Much of Alibaba’s success can be attributed to the flexible nature of its core business model. Compared to major US e-commerce giants such as Walmart and Amazon, Alibaba’s overheads are relatively low. This is because the company primarily connects consumers to retailers and has no physical inventory-handling infrastructure.

As such, it requires fewer facilities and staff to operate. For perspective, Amazon has over 700,000 employees on its payroll, while Alibaba has approximately 117,600.

While Amazon’s net profit margin on sales revenues was lower at 4.1 percent as of 2019, Alibaba’s net earnings within the same period stood at 32 percent. This means that Alibaba has a much higher profit margin from the same amount of sales. Consequently, Alibaba’s profits hit an impressive $13 billion last year, while Amazon recorded $11.58 billion. The Chinese company was able to surpass Amazon’s net profit with less than five times the revenue.

Alibaba’s current growth rate is mostly driven by increased reach in China. This, coupled with coronavirus effects, has helped to increase the adoption of online retail marketplaces. The company user-base increased by 15 million year-over-year in the first quarter ending March. Many of its new clients were from less-developed areas in China.

Alibaba currently has over 750 million Chinese users. Some analysts contend that the lumbering e-commerce behemoth might be reaching saturation point in the East Asian nation.

According to Gil Luria, a research director at D.A. Davidson, Alibaba is already facing stiff competition in its key strongholds, and this might impede its growth in the near future. Speaking to CNBC earlier this month, he pointed out that the company may have to augment its market position by extending its services to other nations.

“Their growth is going to have to come from outside of China. For them to sustain the levels of growth they have right now, with China approaching saturation, Southeast Asia is only going to carry them for so long before they have to get into some of those other markets in order to sustain this growth,” he said.

Alibaba’s current product portfolio includes the formidable Taobao e-commerce platform, and Tmall, its business-to-consumer platform.

Alibaba’s current product portfolio includes the formidable Taobao e-commerce platform, and Tmall, its business-to-consumer platform. Image: Mashable

The firm is also dabbling in cloud computing. According to Chief Finance Officer Maggie Wu, its cloud computing subsidiary, Alibaba Cloud, is set to become profitable by the end of the year. The division has been facing immense competition from established players such as Microsoft, Amazon, and Google.

The ancillary agency has been in operation for more than a decade and has struggled to break into the US market. It is likely to face more legislative headwinds in the future as the nation enacts more anti-Chinese statutes to safeguard American trade interests.

Image credit: BigTunaOnline



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