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Takeaway: We're monitoring one key metric to time the short. At 16x 2015 revenues, we have no problem waiting for the turn.

KEY POINTS

  1. F3Q15 A MIXED BAG: Singles Day for BABA was considerable success in terms of GMV growth, but we don’t believe that strength held throughout the quarter, especially given lackluster China retail metrics.
  2. CONSENSUS NOT ASKING FOR MUCH, BUT WILL IT BE ENOUGH: Consensus estimates are calling for a notable deceleration in revenue growth to 47% from 54% in F2Q15.  We’re expecting a small top-line beat, but the question is by how much, and whether it will be enough to appease the street.
  3. WHAT WE’RE KEYING IN ON: Tmall GMV mix, which has been a secular growth driver, propelling commission revenue growth ahead of GMV growth, and masking secular pressures within its core marketing segment.  But once that sputters out, we’ll have our entry point on the short side.  At 16x 2015 revenues, we can wait for the turn, and still capture plenty of downside when it does.

F3Q15 A MIXED BAG

The majority of BABA’s business model can be tied back to its GMV, which is the simplest way to gauge the strength of its business.  Below is a quick graphic on how we conceptualize BABA’s model and key secular drivers.

BABA: Thoughts into the Print (F3Q15) - BABA   GMV Model Impact

Regarding F3Q15, we all know Singles Day (November 11th) was a considerable success for BABA, with GMV up ~58% y/y; if that rate were to hold throughout the quarter, it would mark a considerable acceleration over the 49% it achieved in the prior quarter.  However, the big risk is the elevated percentage of Mobile GMV% (42.7%), which is concerning since mobile is a headwind to BABA’s core marketing segment (see link below).   If that elevated Mobile GMV % were to hold through F3Q15, it would market the largest y/y acceleration in BABA’s reported history.  

If we were to bet on one of either the GMV growth rate or the Mobile GMV % holding for the quarter, we would take the latter.  In the first chart below, we compare y/y growth rates of BABA’s GMV vs. selected China Retail metrics that we believe best aligns with BABA’s core e-commerce categories.  It’s a mixed bag at best, suggesting the strength from Singles Day was not likely representative of BABA’s GMV this quarter. 

BABA: Thoughts into the Print (F3Q15) - BABA  GMV vs. Retail 

BABA: Thoughts into the Print (F3Q15) - BABA   e com product share

CONSENSUS NOT ASKING FOR MUCH, BUT

Despite what is looking like a mixed bag of a quarter in terms of GMV, and the potential headwind from growing Mobile GMV mix, consensus estimates aren’t out of reason.  Expectations are fairly muted, calling for a notable deceleration in revenue growth to 47% from 54% in F2Q15. 

That said, we’re expecting a small top-line beat of RMB 27.8B vs. RMB 27.6B (or ~2% upside).  However, BABA has so many smaller moving parts, particularly within its non-core segments, that could potentially drive growth higher than we're expecting.  The bigger question is how big of a beat is the street expecting, especially following its F2Q15 (CY 3Q14) release when it beat top-line estimates by 5%.

WHAT WE’RE KEYING IN ON

Tmall GMV mix, which continues grow in proportion to total GMV, has been driving Commission revenue growth ahead of GMV growth (BABA collects commissions on Tmall transactions).  As long as this mix shift continues, it could continue to mask the secular weakness we're expecting for its core Marketing segment since both Marketing and Commissions are reported in a single line item (China Retail).

BABA: Thoughts into the Print (F3Q15) - BABA   GMV vs. Commissions

However, Tmall GMV mix shift appears to be losing steam; BABA hasn't delivered sequential improvement in its Tmall GMV % over the last two quarters. While we expect a seasonal uptick in F3Q15, we're keying in on the magnitude of that increase.  Because once Tmall GMV mix sputters out, commission growth will converge with GMV growth, and will no longer be able to compensate for the weakness we're seeing in its core marketing segment.  

BABA: Thoughts into the Print (F3Q15) - BABA   Tmall GMV   

As a reminder, our bearish thesis centers around the influx of a much weaker consumer pressuring BABA's model, particularly its core marketing segment (~60% of revenue), where we expect lower advertising ROI to pressure ad rates, which has already started (see link below for more detail).

BABA: Model Facing Secular Pressure

12/04/14 09:17 AM EST

[Click here]

Let us know if you have any questions, or would like to discuss in more detail.

Hesham Shaaban, CFA

@HedgeyeInternet