The future of Alibaba
Alibaba is a Chinese company that was founded in 1999 by Jack Ma. Ma started the company with $60,000 he had raised from friends, but he is now one of the world’s richest men, worth an estimated $47.3 billion. After years of growth, the company had a successful IPO (initial public offering) on the NYSE in 2014. Investors felt optimistic about its many business lines, such as cloud computing services and Alipay, its mobile payments service. However, one of Alibaba’s main business lines is its domestic eCommerce business. This is much like Amazon or eBay to us.
Although, recently, the Chinese authorities launched an investigation against Alibaba for monopolistic behaviour. China's State Administration for Market Regulations opened an investigation in December 2020, alleging that Alibaba made merchants chose between one of two platforms instead of allowing them to use both. This announcement caused shares in the company to drop by more than 8% in one day. This came at a similar time when regulators halted the IPO of another of Jack Ma’s companies, Ant Group.
Following the regulatory investigation, Alibaba was fined a record $2.8 billion. While this was a record-breaking fine, it only equated to 4% of Alibaba’s 2019 revenue. More importantly, the fine marked the end of the regulatory probes. All of this meant that the Alibaba stock price experienced a sharp rise of 6.5%. But what is actually so attractive about Alibaba as an investment?
Domestic consumption is likely to increase in China over the coming years. Whereas previously China has relied on exports as its source of rapid economic growth, increasing wages mean this is not a sustainable growth strategy. For example, in 2006, exports as a percentage of China’s GDP were 64%, but in 2019 they were just 32%. Consequently, the Chinese government has implemented a “dual circulation” strategy to focus on harmonising domestic consumption and exports and try to address the imbalance.
Alibaba is perfectly placed to capitalise on this growth in domestic consumption. COVID-19 has shifted an increasing proportion of sales online, and Alibaba has a 60% market share in eCommerce. This, combined with already strong revenue growth as illustrated below, sets out a strong future for Alibaba.