Once a big inside the Chinese technology industry, Alibaba Group (NYSE: BABA) has fallen from grace in recent times. It faced quite a number of challenges, corresponding to competition and the crackdown by the Chinese government, which impacted its performance. And after the conglomerate delivered its weakest growth — 2% — inside the last fiscal yr, investors aren’t too optimistic about its prospects.
Yet, inside its vast empire lies a hidden gem quietly emerging as the next growth engine for the company.
Alibaba’s overseas e-commerce business
Alibaba is generally known for its flagship e-commerce businesses, Tmall and Taobao. But its e-commerce empire goes well beyond its home turf, focusing mainly on two varieties of business models.
The first part pertains to cross-border e-commerce business operating under AliExpress and Alibaba.com. The previous is a worldwide retail marketplace, available in 17 languages besides English, specializing in selling products from China to overseas consumers.
The latter is a wholesale marketplace focusing mainly on selling products in bulk to overseas customers, especially merchants who resell these products locally. Based on Alibaba, over 47 million buyers from over 190 countries sourced business opportunities or completed transactions on Alibaba.com inside the yr ended March 31, 2023.
The second a component of Alibaba’s overseas e-commerce empire stems from its majority ownership in local marketplaces Lazada and Trendyol. Lazada is actually certainly one of the leading e-commerce platforms in Southeast Asia, behind the leader, Shopee. It also operates an e-commerce logistics network on this region, complementing its e-commerce marketplace offerings, identical to the symbiotic relationship between Tmall and Taobao with Cainiao.
Trendyol, nonetheless, is the leading e-commerce platform in Turkey in the case of GMV and order volume. It serves consumers with a broad alternative of services and products through its e-commerce business and offers local consumer services corresponding to food and groceries. Like Lazada, Trendyol also operates its logistics service under Trendyol Express and Trendyol Go. Trendyol also helps Turkish merchants sell across six continents.
Collectively, these businesses form Alibaba’s International Digital Commerce Group. In the first nine months of the fiscal yr ending March 31, 2024, this group delivered a 46% increase in revenue, significantly outpacing groupwide revenue growth of 9%.
International digital commerce has shiny prospects
Alibaba’s international e-commerce business could also be small — its revenue is around one-fifth of the group’s China e-commerce business — but its prospects are vast.
Its relatively small size means it has significantly more room to grow before reaching the size of its sister corporations. Besides, the overseas e-commerce market could be very large (and growing). For perspective, the Chinese e-commerce industry is estimated at $2.9 trillion, accounting for around 50% of world e-commerce.
But as China was the world’s most penetrated e-commerce market in 2023 (about 50%), its peer countries will likely see higher growth rates within the approaching years as they atone for market penetration. Suffice it to say that the expansion opportunities should be tremendous for Alibaba’s international e-commerce group since it focuses on this growing pie.
As an illustration, the recent surge in cross-border e-commerce led by corporations like Temu (owned by PDD Holdings), Shein, and Alibaba’s AliExpress is a giant tailwind that may remain for years. Leveraging the extensive supply chain in China and their experience in China, leading Chinese e-commerce platforms turn their attention to overseas consumers to sustain growth, especially as competition in China intensifies.
Internally, Alibaba’s recent reorganization of its massive empire into separate (and independent) operating units provides the international business group the leverage it must chart its path toward success. With its management team and board in place, the overseas e-commerce business unit can set a long-term strategic direction, make higher decisions, and execute faster to win in its respective markets.
Unsurprisingly, this segment reported the fastest growth amongst the entire business groups inside Alibaba, with revenue up by 44% inside the quarter ended Dec. 31, 2023. Comparatively, groupwide revenue was up by just 5%. This trend could proceed within the approaching quarters if not years.
What it means for investors
The Chinese e-commerce industry has become hyper-competitive in recent times resulting from the rise of next-generation e-commerce players like Pinduoduo and Douying. While Alibaba’s e-commerce businesses (Tmall and Taobao) remain probably essentially the most distinguished player in China, it’s increasingly tougher for them to grow on their home turf.
Understandably, the conglomerate is emphasizing its international e-commerce business more to sustain its growth ambitions. It will not be surprising for this business unit to sustain its high-double-digit growth rate in the next few quarters (and even years). Investors should, resulting from this fact, start paying more attention to this rapidly expanding business.
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Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Idiot recommends Alibaba Group. The Motley Idiot has a disclosure policy.
Hidden Gem: Unveiling the Rising Star Inside Alibaba’s Vast Empire, and Why Investors Should Be Paying Close Attention was originally published by The Motley Idiot