Alibaba Group Holding Ltd (BABA)

[FUNMAN]

Alibaba's Next Growth Driver Is Undervalued

Jan. 26, 2021 2:22 PM ET
Bluesea Research
Growth, Tech
(4,788 followers)

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https://seekingalpha.com/article/4401047-alibabas-next-growth-driver-is-undervalued

Summary

* Subscription businesses are the most lucrative segments within US and several international regions.

* Alibaba could gain significant upside by bringing new subscription services within the Chinese market.

* Alibaba has reported strong growth within its 88VIP, Taobao Pass, and Youku membership segments.

* We can see Amazon Prime-like success by Alibaba in China due to its market leadership and rapidly improving logistics and content business.

* Strong subscription in Alibaba could improve the company's moat and also lead to a longer growth runway for future services.

Alibaba (BABA) is showing rapid growth within its membership business. The subscription business in the US is quite mature with numerous services available for customers. However, the Chinese market is still nascent in this area. Alibaba has the potential to be one of the main subscription players over the next few quarters similar to its leadership within the cloud segment. It is already reporting strong growth within its membership businesses like 88VIP, Taobao Pass, and Youku.

The combined members for 88VIP and Taobao Pass were 35 million by the end of September 2020. Youku also showed 45% year-on-year growth in average daily subscriber numbers. It should be noted that the membership numbers are still low compared to the overall market size. This gives Alibaba a massive growth runway in the subscription business. Amazon (AMZN) has shown the potential of Prime membership by launching a number of services within this membership business. We could see a similar move by Alibaba which should improve the moat for the company and provide a bullish momentum to the stock.

Still Early Stage

It is still an early stage for the subscription model within China. In the US, the Prime membership base has almost reached a saturation level. Other subscription services like Netflix (NFLX) and Spotify (SPOT) are also very popular. However, the customers in China have not fully moved to the subscription model till now. The market penetration of the main players is very low compared to the overall market size.

Alibaba is one of the key players in the subscription business in China with its retail and streaming platform.



Figure 1: Scale of 88VIP and Taobao Pass reported in last earnings. Source: Alibaba Filings

Alibaba is also depending on its Youku platform which offers new streaming content to its customers.



Figure 2: Youku has shown 45% YoY growth in average daily subscriber base. Source: Alibaba Filings

Alibaba is facing challenges from JD (JD) and Pinduoduo (PDD) who are trying to take away market share from Alibaba. Hence, it is very important for Alibaba to rapidly expand its membership base as it increases customer loyalty to its retail platform.

Future Growth Potential
Alibaba has over 750 million annual active customers within its retail platforms. On the other hand, the membership base stands at only 35 million which is less than 5% of the active customers.



Fig: Annual active consumers on Alibaba's retail platform. Source: Alibaba Filings

This gives Alibaba a long growth runway within this segment. Alibaba has lots of different services like streaming content, food delivery, digital payments, physical retail, etc. By having a strong membership program like Amazon Prime, Alibaba can provide a significant tailwind to all services.



Figure: Subscription revenue and growth rate of Amazon. Source: Amazon Filings

In the trailing twelve months, Amazon's subscription business reported revenue of $23 billion with a YoY growth rate of over 30%. Netflix's market cap is close to $250 billion with annual revenue of $25 billion which is equal to a PS ratio of 10. Amazon's $23 billion subscription revenue could also have a similar standalone valuation due to a higher growth rate and a larger halo effect for other services from its membership. Amazon has over 150 million paid Prime members worldwide.

Alibaba does not report membership revenue. But its 35 million membership base from 88VIP and Taobao Pass should be contributing a significant fraction of the Prime revenue base. It is highly likely that Alibaba's management announces some major revenue or membership milestones over the next few quarters. This will give a better idea of the overall subscription business and its impact on the stock valuation.

Halo Effect from Membership
Alibaba is seeing a rapid increase in competition from JD and Pinduoduo. In the last few quarters, PDD's valuation has increased to over $200 billion. It has over 600 million active users on its platform and is able to attract more price-conscious customers to its platform at a rapid pace.

Alibaba needs to show a strong response against these competitors in order to protect its market share and build a strong growth runway. The membership business will be the most important tool available with Alibaba in this area. It is likely that 88VIP and Taobao Pass members will be making higher purchases from Alibaba's platform and will also have greater loyalty towards it. Hence, we could see Alibaba make a significant effort in attracting more customers towards these memberships.

A strong membership base is also a good moat against regulatory pushback. Amazon has also seen a rise in calls for breakup and legislations in the US. However, it has a strong Prime membership which has a renewal rate of over 90%. This loyal customer base reduces the headwinds faced by Amazon on the regulatory front. We should see a similar trend in China. While the regulatory environment is tougher in China compared to US, a strong membership base should provide Wall Street with more certainty over the long-term growth potential of Alibaba.

It will be vital to see the growth in paid membership on 88VIP, Taobao Pass, and Youku platforms over the next few quarters. If Alibaba is able to take the paid membership to over 100 million by end of 2022 it will be a strong signal of the moat built by the company. This should also be a strong bullish factor for Alibaba stock given the regulatory hurdles and rise in competition faced by the company.

Investor Takeaway
Alibaba has reported that its paid membership has increased to 35 million on its 88VIP and Taobao Pass platforms. This is a very small fraction of over 750 million annual active consumers across its retail platforms. We should see more aggressive moves by the company to gain new paid members. This should help the company against JD and PDD. It will also be a lucrative revenue stream that can help the company build new services on top of its paid membership program.

We have already seen the strength of Amazon Prime in the US as well as international regions. Alibaba is in a similar position where it can deliver rapid growth in paid membership over the next few quarters. It will be important to see the growth trajectory of membership within Alibaba and the management's strategy in this segment over the next few quarters.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.