There’s always a lot of talk about “the next big thing.” Will it be self-driving cars, artificial intelligence, robots, fin-tech, re-tech, cloud computing, block chain, streaming- or something completely different? We wish we had a crystal ball for the answer to this, but unfortunately we don’t. What we do know is that online retailing took many years to reach a point where it actually became a threat to brick-and-mortar stores. In New York and malls around the country, it’s become abundantly obvious to the average consumer that retailers are either desperate or outright closing.
For illustrative purposes, below is a stock price chart of Amazon.com, Inc. (AMZN) compared to Wal-Mart Stores, Inc. (WMT) and Gap Inc. (GPS):
5-Year Stock Chart: AMZN vs. WMT & GAP
This begs the question: what propelled this market move? Was it the shift in retailing, with investors finally recognizing this shift to online shopping? Or was this driven by indexation, forcing investment managers to include the shares in their portfolios? Or perhaps it’s because Amazon’s investments in Cloud, AI, and Streaming have finally made enough strides that investors are seeing that the traditional competition to these industries will suffer in the same way as brick-and-mortar stores did (and continue to)?
With the benefit of 20/20 hindsight, we all wish that we had owned Amazon. However, it has been extremely difficult to see the value, and Amazon’s profit margins weren’t (and aren’t) making it very compelling.
The same holds true for many of the larger tech companies in the world. However, they have all made huge investments in some, if not all, of the same possible future disruptor technologies.
Who will be the ultimate winners in the areas of streaming, self-driving cars, AI, robotics, and alternative payments?
One company that has used Amazon’s 20-year-old retail and cloud blueprints, along with the success of eBay Inc.’s alternative payment platform PayPal, is Alibaba Group Holding Limited (NYSE: BABA). This is a Chinese e-commerce company, trading on the New York Stock Exchange. Similar to Amazon, it has extensive investments and interests in a broad range of industries and new, growing technologies (Disclaimer: Pendo LLC holds BABA shares in client and personal accounts).
Founded in 1999 by Jack Ma, the company has grown into its current position as one of the 10 largest market valued companies in the world. It is no longer only an e-commerce company; it is a wide-moat, diverse conglomerate with investments in several related industries.
Jack Ma basically took the playbook of Warren Buffett’s Berkshire Hathaway Inc., combined it with the likes of the successes of Google, Amazon and Apple, and in effect accomplished what they did but in a much shorter time frame. Having someone to follow certainly helped.
Alibaba’s bread and butter is its e-commerce arm, accounting for 86% of the company’s total revenue. However, unlike Amazon which has a 1% profit margin, its profit margin is a whopping 28%. This is unheard of in retailing and is mainly the result of minimal competition at this level. The company has over 529 million unique, active mobile users a month. In comparison, Amazon is estimated to have 300 million active users.
Ant Financial Services Group is an affiliate of Alibaba, but owned by Alibaba employees; primarily Jack Ma. Alipay, the China-based (and world’s largest) alternative payment system is a subsidiary of Ant Financial. Ant is currently in the process of attempting to purchase US-based Moneygram. It has also invested wholly or in part in companies such as Korea’s Kakao Pay, Thai-based Ascend Group, Philippine’s Mynt, Indonesia’s Emtek Products, Inc. and Singapore’s M-DAQ Pte Ltd. In the event of a much anticipated IPO of Ant, BABA will take ownership of 33% of the company.
PayPal recently conducted surveys in China, India, Hong Kong, Singapore, Thailand, Philippines and Indonesia about digital wallets. The report “Digital Payments: Thinking beyond Transactions,” discovered that 57% of those surveyed prefer cash while 24% prefer other traditional payments, with only 12% answering that they use digital wallets as their preferred payment method. This demonstrates that there is plenty of room to grown organically even before taking market share from traditional financial competitors such as banks and credit cards. It was not that long ago that mobile- (and now “smart-”) phones were a rarity; the growth has been nothing short of phenomenal, surpassing 100% penetration in many countries.
In addition to all this, Alibaba operates a business unit and cloud computing arm called Alibaba Cloud, which reached 1 million paid users last quarter. This number grew by 96% YoY. BABA also operates logistics throughout Southeast Asia, has an entertainment arm which just entered the gaming industry, and just made a commitment to invest an additional $15 billion in R&D over the next three years. For the quarter ending June, Alibaba’s revenue grew by 56% and its non-GAAP net income grew by 65%.
Note: This report is not meant as a recommendation to buy, but as a highlight of an interesting company.