BABA: Model Facing Secular Pressure

Takeaway: We expect a weaker consumer to pressure GMV growth; turning one of BABA's core growth drivers into a secular headwind.


  1. GMV DRIVES BABA’S MODEL: Marketing & Commissions represent ~80% of BABA’s revenues.  Both are driven off its GMV, which we expect to decline precipitously through F2017 as weaker consumer pressure average spending.  See link below for more detail. 
  2. MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions.  The bigger issue is Marketing Revenues (~60% of total), which is facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI.  We’re already seeing this in BABA’s financials today.


Below is a quick review of BABA’s core segments and drivers.  In short, GMV drives roughly 80% of its model.

BABA: Model Facing Secular Pressure - BABA   GMV Model Impact 

  • Marketing Revenues (~56% of total): sourced from vendors on BABA’s sites advertising to BABA’s consumers, vying their GMV.  Roughly 75% of BABA’s marketing revenues come from P4P ads, which require users to click the ads for BABA to get paid.  BABA’s ad prices are determined through on online auction platform, which means its vendors set the price based on expected ROI.  In short, the same factors that drive GMV also drive its marketing revenues. 
  • Commission revenues (~23% of total): generated as a percentage of the GMV transacted on its Tmall platform specifically settled through Alipay (BABA’s equivalent to Paypal).  The commission rate ranges between 0.3% and 5.0%. 

We expect GMV to decline precipitously through F2017.  The key theme is that user growth will come from a much weaker consumer who can’t afford to spend as much.  In turn, GMV will grow at a disproportionately lower rate than user growth since average spending/GMV will be on the decline; reversing what was a considerable tailwind into a headwind.  We detailed our GMV analysis in the note below. 


BABA: What the Street is Missing

11/26/14 08:03 AM EST

[click here]



model facing secular pressure

Naturally, slowing GMV bodes poorly for commissions.  The bigger issue is BABA’s Marketing revenues (~56% of total).  Our concern here is secular pricing pressure.  BABA’s new user growth will come from less-affluent consumers who must be more selective with their purchases.  Ultimately, that means that a vendor’s advertising ROI will decline as ad conversions (transactions) are inhibited by the average user’s waning ability to spend on its platform (as measured by average GMV). 


In essence, the value of advertising on BABA’s platforms is directly linked to its average GMV, which we expect to decline through F2017, pressuring ad rates along the way.  We already saw signs of this in its F1Q15 quarter ending 6/30/14 (comparable data isn't available for its most recent quarter).  BABA attributed the F1Q15 decline in cost-per-click to a higher proportion of mobile marketing services, "for which our vendors currently pay a lower cost-per-click"  


 BABA: Model Facing Secular Pressure - BABA   P4P pressure 2



BABA’s ad prices are determined through on online auction platform, which means its vendors set the price. We suspect the reason why mobile rates are lower is because mobile is the low-cost vehicle for internet access in China.  Put another way, mobile is how China’s less affluent access the internet.  BABA’s reported metrics suggest as much, given that its mobile users spend less on average (mobile represents the majority of its shoppers, yet the minority of its GMV).


BABA: Model Facing Secular Pressure - BABA   Mobile vs Total


Mobile will likely remain the primary source of both new internet users and new BABA shoppers moving forward.  New user growth will come a progressively weaker consumer moving forward; meaning the pricing pressure that BABA is already seeing in its marketing business is actually as secular headwind.




See the link below for a broader summary of our thesis.  Let us know if you have any question or would like to discuss in more detail.  


BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

[click here] 


Hesham Shaaban, CFA



SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more