There are several takeaways from these historical financials.
- Alibaba's Core Commerce business has grown at 41% annualised growth rate during FY2015-21 period.
- Other Commerce has grown at 44% rate as Alibaba launched new services such as Logistics (Cainiao) and others.
- Cloud business has been the fastest business segment within Alibaba growing at 90% CAGR, although its share still remains relatively low (just 8% of total revenue in FY2021).
- The company's Commerce margin has been steadily declining as the market has been maturing pushing Alibaba into rural lower-income regions. Rising competition has also forced Alibaba to step up its investments in new formats and products. Commerce EBITDA has declined from 65%-62% level in FY2015-17 to 38%-31% in FY2020-21. It is likely that the margins will remain under pressure as competition remains high and Alibaba continues to expand in lower-income areas.
- The trend in Cloud margins has been opposite to that of Commerce. The business segment turned profitable during FY21 and will likely enjoy rising margins in the medium-term.
How can Alibaba's growth and margins look like in the future?
- Digital media has seen gradual reduction in relative losses from -42% in FY2015 to -20% in FY2021.
I think it is reasonable to expect Alibaba's growth to slow down and its margins to continue to decline in the future. The company can probably maintain higher margins in the short-term if it does not expand into regions, but this may create longer-term problems especially as new rivals are gaining strength in those regions and could pose a challenge to Alibaba in core markets.
Its revenue is driven by four factors:
- Overall growth of Chinese consumer market
- Launch of new services outside of retail
I think the Chinese retail market
could be growing at 10-15%
over the medium-term (in nominal terms) on the back of 5%
GDP growth, increasing a share of consumption in the GDP (currently 39% compared to 60% for richer countries) and some inflation on top of this.
It will be hard for Alibaba to increase its market share
even if it expands in new regions or experiments with new formats. At the same time, I do not think that it can start losing its market share quickly given its scale advantages and focus on innovation. So, probably, a growth in line with the overall Chinese market or just slightly below it is the most likely scenario (base rate).
The third factor (Take rate
) can make a big impact. Currently at 4.08%
, I think it can grow higher in the medium term (in line with the management's goals) due to additions of new services for merchants. At the same time, stricter regulation and rising competition will limit the upside.
I think reaching a 5-6%
level of Take rate is achievable for Alibaba taking into account that some other e-commerce players enjoy over 10% take rates in other geographies.
The fourth and final factor – a launch of new services
can add about 10-15%
to the overall growth rate of Alibaba (in line with its historical contribution to group growth). Other services such as Cloud and Digital media have been growing at an annual rate of 90% and 44% since FY15 (faster than retail operations of Alibaba), but since they account for just 13% of the total revenue, their overall impact on the company's growth rate is limited.
Taking all four factors together, I think a growth rate of 30-40%
is reasonable over the medium term with a likely slowdown in core Commerce segment partially offset by new segments.
My expectations for margins are more negative. Rising margins at Cloud and eventual breaking even of Digital media should positively impact group margins, but the bulk of profits are coming from the Commerce segment which will likely face a continued decline in margins (as discussed above).
Margins of offline retailers in mature markets are in 2-5% range. The more modern Chinese retailers with dominant Marketplace business would probably maintain higher margins, so, perhaps, a 10-15%
range is plausible (over the medium to long-term).
Despite such deterioration in margins, the overall EBITA of the Commerce segment could still deliver about 10-15%
growth rate per year if the overall sales in that segment continue to grow at 20-30%, while the margins fall from 31% (in FY21) to 12% in 10 years.
Group EBITA could rise a little faster than that (15-20%)
due to growing contributions from other business segments.