BABA: What the Street is Missing

Takeaway: China’s Elite drives BABA’s GMV. BABA's user growth moving forward will come from a much weaker consumer; a double-edged sword for its GMV.

INTRODUCTION

We hosted a call last week laying out our BEAR case on BABA, and the key metric we're tracking to time the short opportunity (contact us for the deck and replay).  We're going to publish a series of short notes detailing the salient points from the call.  This is the first, and maybe the most important.

  

KEY POINTS

  1. CHINA’S ELITE DRIVES BABA’S GMV: Both GMV/Active Buyer (average spend) and its cohort commentary suggest China’s upper class drives its GMV.  After comparing these metrics to China consumer demographic data, there is no other plausible explanation.
  2. GROWTH WILL COME AT A PRICENew BABA consumers will have considerably less funds to spend.  In turn, user growth will pressure BABA’s average GMV; turning what was a growth driver into a headwind, and leading to a sharp deceleration in GMV growth through F2017.  Note that ~85% of BABA’s revenues are linked to its GMV.

 

CHINA’S ELITE DRIVES BABA’S GMV

The average consumer on BABA’s China Retail sites spends roughly ¥6.5K annually (~USD $1.1K).  In the chart below, you can see the distribution of China’s internet users by income (red columns) and what BABA's average GMV would represent as percentage of their incomes (orange columns).  In short, BABA’s GMV would be a prohibitively large amount for most consumers in China; especially since BABA can’t sell’s everything.   

 

BABA: What the Street is Missing - BABA   China s Elite

BABA: What the Street is Missing - BABA   Can t Sell Everything

 

The other thing to consider is BABA’s cohort commentary on its F2Q15 earnings call, which we have pasted below. 

 

BABA F2Q15 Earnings Call (Maggie Wu): “Let me share with you some color on this average spending per buyer. As I said that the longer customers stay with us, the more they're going to spend annually on our platform. I'll give you an example”

    • “The customer who stayed with us for a year's time, their average annual spending level is somewhere around RMB 1,000
    • “And for the ones who stayed with us for five years' time, their spending level is somewhere around RMB 15,000
    • “And then for the ones who stayed around 10 years, their levels is going to above RMB 30,000

 

The amounts spent by those on the platform for more than 5 years are just jaw-dropping when you consider the income distribution of China’s internet users.  If we compare these metrics to the first chart above, only 5% to 14% of China's internet population at most could afford to spend ¥15K-¥30K annually; let alone BABA's ¥6.5K average GMV. 

 

GROWTH WILL COME AT A PRICE

The obvious takeaway is that BABA’s GMV is currently hostage to the whims of its upper class consumers.  What’s more concerning is that GMV growth moving forward will be driven primarily by new consumers with considerably less to spend.  In turn, new user growth will come with disproportionately lower GMV growth since average GMV is facing decline; turning what was a growth driver into a headwind.

 

We illustrate this dynamic in our China GMV Market Model, which is driven by user growth and e-commerce spending projections (both by income cohort); the former being the more important driver.  As new lower-income consumers join the BABA platform, they will grow in proportion to BABA’s total users; driving down both average income and average spending of its user base. 

 

BABA: What the Street is Missing - BABA   GMV Model Penetration

BABA: What the Street is Missing - BABA   GMV Model growth

 

Note that roughly 85% of BABA’s revenues are linked to its GMV, which our model suggests is heading for sharply decelerating growth through F2017. 

 

We will be publishing a follow-up note with more detail on the impact of our GMV projections on BABA's business model.  In the interim, see link below for broader summary of our bearish thesis, or let us know if you would like to see our BABA deck.

 

 

BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

http://app.hedgeye.com/feed_items/38742

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more