Alibaba Group Holding Ltd (BABA)

[FUNMAN]

Alibaba Looking To Replicate Amazon Prime's Success

Feb. 19, 2021 1:24 PM ET

Alibaba Group Holding Limited

If for some unknown reason BABA pulls back to under $250 I will add to my position.

Read the article at this link to see the graphics:

https://seekingalpha.com/article/4407476-alibaba-looking-to-replicate-amazon-success

Summary

* Alibaba's digital media business has shown significant improvement in margins in the recent quarter.

* The digital media segment reported margins of negative 17% compared to negative 42% in the year-ago quarter.

* The digital media business could be a big competitive advantage over retail rivals like JD and Pinduoduo.

* Alibaba could build its digital media business as a main attraction to build a solid membership base similar to Amazon Prime.

* The rapid improvement in Alibaba's original content catalog and membership will be a decisive factor for the stock.

Alibaba (BABA) has reported strong numbers in its digital media business which could help the company build a stronger ecosystem in the next few quarters. The year-on-year revenue growth in this segment was only 1% compared to 37% YoY growth for the entire company. However, the average daily subscriber base for Youku has increased by 30% compared to the year-ago quarter. This has been a big tailwind for its 88VIP subscription business. The margin in this segment has also improved from negative 42% to negative 17% due to more careful spending by the management on new content. This alone has helped the company reduce losses by close to $1.2 billion on an annualized basis.

Alibaba Pictures has invested and distributed some of the top-grossing movies in China in the last year. It also has produced popular dramas like "Professional Single" which has led to rapid growth in subscribers.

Alibaba is facing tough competition from JD.com (JD) and Pinduoduo (PDD). A strong subscriber base and traction in the Youku platform can help Alibaba build a better moat for its other businesses.

Alibaba could end up replicating the success of Amazon's (AMZN) Prime membership with the help of its digital media business. It would be important to note the future margin improvement and subscription growth in this segment to gauge the long-term growth runway for the company.

Focus On Subscribers And Margin

The YoY revenue growth in the Digital Media business was only 1% in the latest quarter. It looks very low in comparison to the overall revenue growth of 37%. However, even with this modest revenue growth, Alibaba reported close to 30% YoY growth in subscriber base for Youku.



Figure 1: YoY growth in various segments of Alibaba in the latest quarter. Source: Company Filings

While the revenue growth was not impressive, the margin improvement in the Digital media segment has been significant.



Figure 2: Improvement in the margin of Digital media segment. Source: Company Filings

In the year-ago quarter, Alibaba reported a negative 42% EBITA margin in this segment. In the latest quarter, the EBITA margin was negative 17% which is an improvement of 25 percentage points. This has helped the company reduce its losses from RMB 3.4 billion in the year-ago quarter to RMB 1.39 billion in the latest quarter which is equal to a saving of $1.2 billion on an annualized basis.

Challenge From Competitors

On a standalone basis, the Digital Media segment is not very impressive when we look at the revenue stream from other businesses. However, the impact of this business is much bigger on the overall ecosystem of the company. Alibaba is seeing a significant increase in competition with Pinduoduo. The Digital Media business will be the main tool available with the management to build a stronger defense against it.

A rapidly growing subscriber base can help Alibaba replicate the success of Amazon Prime. Having a high-quality original content catalog will be the deciding factor. It is also unlikely that JD and PDD will be able to match Alibaba's capacity to invest in the digital media business. This gives Alibaba a massive edge and should be a tailwind for other businesses of the company.



Figure 3: Growth in Amazon's subscription business over the last few quarters. Source: Company Filings

We can see from the above image that Amazon has been very successful in building a high-growth business segment from its subscription segment. The trailing-twelve-month revenue from the subscription business of Amazon was more than $25 billion. Alibaba has not broken down its revenue from Youku subscribers and its 88VIP membership business. But it has mentioned that the total membership base is now more than 35 million.

Alibaba is in a strong position to build a subscription business as big as Amazon's. The digital media business will be the main driver of this. While the margins in this segment will not be very high, the tailwind provided by the digital media business to the overall ecosystem will become important in the next few quarters.

Future Direction For Digital Media Business

Most of the theaters and production of movies and shows have returned to pre-pandemic levels in China. Alibaba's management has been cagey about the subscription number of Youku. However, according to Variety, Youku could have a subscriber base in the range of 90-100 million while Tencent Video has 112 million and iQIYI has 119 million subscribers. It should be noted that Amazon Prime has close to 150 million subscribers, many of them in emerging markets like India where subscription cost is much lower than the domestic US market.

There is intense competition for subscribers and it is likely that Alibaba will use its resources to improve the growth rate within this segment. Alibaba has already reported a 30% YoY growth rate in the subscriber base of Youku in its latest earnings. At this rate, Alibaba could hit 200 million subscribers by 2023 within Youku. This will have a halo effect on its 88VIP membership business which provides additional retail discounts and faster delivery to its members.



Figure 4: Alibaba's MAUs has hit 902 million. Source: Company Filings

The monthly active users or MAUs for Alibaba is over 900 million. Pinduoduo is rapidly closing the MAU gap with Alibaba. Hence, it is important for Alibaba to have more loyal customers. Youku and 88VIP membership are the primary tool available with Alibaba to increase customer loyalty.

At 100 million subscribers, Youku's membership is still a fraction of Alibaba's MAUs which gives the company a long growth runway in this segment. It will be very important to note the future subscriber trajectory of Youku to gauge the success of Alibaba in building a stronger moat for its ecosystem.

Investor Takeaway

Alibaba has been able to improve the margins within its Digital Media segment by 25 percentage points compared to the year-ago quarter. This has reduced the losses for the company by $1.2 billion on an annualized basis. At the same time, Alibaba's Youku has reported a 30% growth in average monthly subscribers. According to external estimates, Youku's subscriber base could be close to 100 million. At its current growth trajectory, it could hit the 200 million mark in 2023.

Alibaba has over 900 million MAUs on all its platform. A higher subscriber base should increase customer loyalty and help the company fend off competition more effectively. Investors should closely watch the future trajectory of subscribers in Youku and the impact it has on other business verticals of the company.

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.