How far can the euphoria over Alibaba Group Holding Ltd go? Even by the standards of online retail, its rise has been extraordinary. Revenue has grown by an average 52% annually over the past five years. Its 158 billion yuan ($23 billion) of sales in the 12 months through March was more than 10 times the 2011 figure. Far from slowing as it grows, Alibaba appears to be keeping up the pace: Revenue will rise 45-49% in its 2018 fiscal, the firm said last week.
That’s most impressive when you consider how dominant Alibaba already is. It’s easiest to increase revenue from a low market-share base, but the Chinese e-commerce firm is already little short of a monopoly. Sales through Alibaba’s online marketplaces have been hovering around 70% of the national total for several years now, and rose to 80% in its most recent fiscal year.
That scale of dominance still suggests the kernel of a problem, though. Any seller of consumer goods must eventually contend with the law of big numbers: The larger you get, the harder it is to keep growing. Luckily Alibaba recognizes this, and is putting its considerable cash flows to work in finding the next leg of growth. While the e-commerce business makes up more than 82% of sales, Alibaba is following the Amazon playbook by using that money to help fund a much larger business. Take Alibaba’s cloud business. Fourth-quarter revenue from the business came in 4% higher than consensus.
Sure, growth has been slowing and there are plenty of formidable global rivals, but the unit is expanding at almost twice the rate of Alibaba’s core e-commerce business, reaching almost $1 billion last year from $63 million in 2012. It was the emergence of Amazon’s cloud business that converted all the non-believers on that stock.
Alibaba never faced the same challenges Amazon did of convincing the public markets that it had promise, since its 2014 IPO came well after the world finally accepted the fact that online shopping represented the future of retail. Indeed, the stock hasn’t had a sell rating since 2015 among the 51 analysts that follow it. The share price is currently just 31 times blended forward 12-month earnings as against over 68 times at Amazon, and there’s 91 billion yuan of net cash still sitting on the balance sheet.
Alibaba has come a long way. It’s not even started to run out of steam.