Just how much bigger can Alibaba grow? Worried investors who've driven the stock down about 18 percent this year appear to be saying, not that much.
The company founded by Jack Ma is already remarkably dominant. Gross merchandise volume, a measure of all transactions carried out over Alibaba's platforms, accounted for more than 11 percent of China's total retail sales in the December quarter, according to the company's third-quarter results Thursday. That's a share of the national market comparable to all of Wal-Mart's sales plus all the transactions through Amazon.com put together, based on estimates from consultancy ChannelAdvisor:
It looks even bigger when you consider it in relation to the online subset of retail. About three-quarters of Chinese online spending takes place inside Alibaba's caves:
What share of all that activity is Alibaba able to capture? An online marketplace that takes too much money from buyers and sellers risks driving them to competing exchanges that charge lower fees. China's JD.com, for instance, has a marketplace business that's growing much faster than its core direct-to-consumer division.
In its results yesterday, Alibaba pointed to a ``meaningfully higher" monetization rate, the share of gross merchandise volumes the company is able to capture for itself. Take a longer-term view, however, and the tax Alibaba is able to levy on customers looks remarkably consistent:
That suggests that any improvement in the company's profits must come from top-line growth. What are the prospects there?
Not as bad as you'd think. For all the angst about China's slowing economy, its retail sector is growing at about five times the pace of the U.S. and looks set to definitively overtake the dollar value of U.S. trade this year:
Online also continues to grow as a proportion of the overall market. China's online retail activity currently makes up the highest proportion of the total in any country globally, according to consultancy eMarketer, and will grow from 16 percent of all sales in 2015 to more than 33 percent in 2019:
Even if you discount such a rosy level of forecast growth, Alibaba is no longer looking costly. Following the stock's slump so far this year, its forward price-earnings ratio is 25.8, only narrowly ahead of the 25.4 average for the 55 companies in the EQM Online Retail Index and well below Amazon's 64.8 multiple. While the company has gotten as big as it's likely to get in relation to its market, Alibaba can afford to lose ground to the competition and still outperform peers in slower-growing economies.
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