- GMV GROWTH TO SLOW PRECIPITOUSLY: China's upper class drives the bulk of BABA's GMV. There is no other plausible explanation after comparing BABA's reported metrics to China consumer demographic data. That means the next wave of user growth will come from a much weaker consumer, leading to declining GMV/Active Buyer, and slowing GMV growth.
- MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions. But the bigger issue is Marketing Revenues (~60% of total), which are facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI. We were already seeing this in BABA’s financials, but the street just took notice this last print, because...
- TMALL CAN'T SAVE THE DAY: The one thing that was keeping us on the sidelines was the migration of GMV moving over to BABA's Tmall platform (where BABA collects commissions). That sputtered out in F3Q15, leading to a sharp slowdown in Commission revenue growth, which exposed the weakness in its Market segment (both reported in its China Retail segment). Tmall Mix shift can't be trusted a secular growth driver moving forward, so we don't need to worry about getting run over by it longer term.
- HEFTY PRICE, WORSE DILUTION: BABA is trading at ~13.7x P/S for 2015, at least 1 full turn ahead of its large cap comps (FB, LNKD, TWTR) despite having the lowest consensus growth expectations of the group. What's more concerning is the amount of new float set to hit the market, with the potential risk from its pending lock-up expiration in March, and the spin-off of YHOO's BABA stake in 4Q15 (the latter will double BABA's current float).
SUPPORTING data and ANALYSIS
We have outlined our bearish thesis in a series of notes, which will provide supporting detail behind our analysis. Below, we highlighted three notes corresponding to the first three Key Points above.
BABA: What the Street is Missing
11/26/14 08:03 AM EST
BABA: Model Facing Secular Pressure
12/04/14 09:17 AM EST
BABA: Hammer and Nail (F3Q15)
01/29/15 11:09 AM EST
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA