- QUARTER LOOKS REALLY GOOD AT FACE VALUE: BABA beat both top and bottom line estimates, with revenue growth accelerating across each of its segments. Gross Merchandise Value (GMV) also accelerated on a y/y basis alongside accelerating growth in the TTM total in Active Buyers on its sites.
- BUT CONFIRMS OUR CONCERNS WITH THE MODEL: GMV/active buyer declined on a y/y basis for the first time in its reported history, alongside an acceleration in the percentage of Mobile GMV transacted on its sites. We believe these two factors are related, and correspond to the rise of the weaker Chinese e-commerce consumer. As we mentioned in our most recent note (below), if GMV/Active buyer is on the decline, then the average buyer (and their ad clicks) are worth less to the vendors on BABA’s sites who are advertising to them. That means growing pricing pressure across its core marketing business (~60% of total revenue).
- WITH A NEW CONCERN EMERGING: The only thing that is keeping us on the sidelines on the short side is the migration of GMV from Taobao to Tmall, which is a massive tailwind for the company since BABA collects commissions on Tmall transactions. While commission revenues remained strong (nearly doubled y/y) with Tmall GMV % up 5 percentage points y/y, that percentage remained relatively flat over the past two quarters. We’re not sure what the ceiling is for Tmall GMV %, but unless we see a material uptick from here, commission revenue growth will slow precipitously; making the growing pressure in its marketing segment more evident.
For more detail on our bearish long-term thesis, see link below. Let us know if you have any questions, or would like to discuss in more detail.
BABA: Leaning Short, But...
10/21/14 07:02 AM EDT
Hesham Shaaban, CFA