Amazon's Odds Get Longer as "D-Day" Approaches
Companies / Internet Nov 03, 2014 - 12:08 PM GMTBy: Money_Morning
William Patalon III writes: Part of our investment "thesis" with Alibaba Group Holding Ltd. (NYSE: BABA) is that the e-commerce giant has designs on markets besides China.
And we got a solid sign of that early last week.
Last Monday, at the Wall Street Journal's 2014 Global Technology Conference, Alibaba Chairman Jack Ma said he hoped his payments company, Alipay.com, could link up with Apple Inc. (Nasdaq: AAPL) and its new mobile payment system, Apple Pay.
"I'm very interested in that," Ma told journalists during an interview at the event. "A good marriage needs both sides working hard. I respect Apple and I respect [Apple CEO] Tim [Cook] very, very much – from the heart. I hope we can do something together."
Just a few minutes later, Cook – who was in the audience and interviewed up on stage right after Ma – said he would like to see Apple collaborate with Alipay.
This was more than just an exchange of pleasantries between two top tech CEOs.
It tells us that a deal will likely get done. And it would be an important deal for both companies.
Here's why…
The War May Have Already Started
In early October, we took our first look at Alipay, the largest player in China's online-payment market. Ma and Alibaba launched it in 2004. And it has grown into a behemoth: It has 300 million users and accounts for nearly half the market in China's electronic-payments segment.
And that "market" is huge. In China, Alipay already processes nearly four times the amount of payments the PayPal unit of eBay Inc. (Nasdaq: EBAY) does globally ($778 billion to $203 billion). Alipay is moving into online transfers, is loaning money to small businesses, and wants to start one of China's first "private banks" for wealthy investors, the New York Times has reported.
And by paying higher interest rates for Yu'e Bao (a money fund that's zoomed to be one of the world's largest over the past 12 months), Alipay is grabbing deposits that would previously have gone to state-run banks.
"Alipay has become the default payment platform for the majority of users for nearly every online or mobile e-commerce transaction, and an increasing number of offline transactions as well – I even use Alipay to pay my rent and utilities," Zennon Kapron, the managing director of Kapronasia, a Shanghai-based financial consultant, told The Times. "Banks are already facing challenges in maintaining profitability and credit quality, and they definitely recognize Alipay and Yu'e Bao as a threat."
Then there's Apple Pay, which the Cupertino, California-based "iDevice" giant rolled out on Monday.
Apple is working with Visa Inc. (NYSE: V), MasterCard Inc. (NYSE: MA), and American Express Co. (NYSE: AXP) – essentially a credit card-sector "trifecta." More than 500 banks have agreed to partner with Apple since the service was announced last month.
Apple Pay is largely a "point-of-sale" (POS) system that will give iPhones increased utility: consumers will be able to "swipe" their phones at checkout counters to pay for their purchases. With the security feature created by the iPhone thumb reader, Apple Pay would act as a digital substitute for physical charge cards. (There's also a "Touch ID" feature for purchases other than point-of-sale transactions.)
According to market researcher Gartner, the global market for mobile payments is projected to nearly triple – from $235 billion last year to $720 billion by 2017. In the U.S. market every day there are more than 200 million credit card and debit card transactions – with American consumers spending $12 billion in the process.
The idea is to make sure Apple Pay "works anywhere Visa and MasterCard are accepted," Darrin Peller, an analyst who covers payment firms for Barclays Capital, told Barron's.
And Cook, the Apple CEO, said his company's payment service had 1 million sign-ups in its first 72 hours. There are already more credit cards associated with Apple Pay than with all other similar "tap-and-pay" services combined.
For Alibaba, a linkup with Apple would be just the start of its move into the U.S. market.
Target: America
At the same Global Technology Conference, the Alibaba founder also vowed to expand his company's investments in the U.S. tech sector.
Earlier this year, Alibaba launched a "beta" (test) site for an American e-commerce site called 11Main.com.
Ma referred to it in comments he made at the conference. And he told attendees to expect more.
"We've invested a lot in this space and we're going to invest more," Ma said. "I got my inspirations from Silicon Valley… it's our time to come here and invest in Silicon Valley."
That's already happening. Alibaba has a U.S. investment team that's headed by Michael Zeisser, the former dealmaker for cable magnate John Malone.
During the past two years, Zeisser's unit has taken big stakes (and board seats) in strategically positioned startups in the e-commerce, mobile, and logistics sectors. Some of these players are "online," while others are "offline."
The goal of these investments is to "soften the beach" for when Alibaba decides it's time to make a big move into the U.S. market, Hany Nada, a founding partner of GGV Capital, a venture firm that invested in Alibaba in 2003, told Reuters earlier this year.
Ma and Alibaba "want the optionality to see if a technology or trend takes off in the U.S., or to see if it's applicable to bring back home," Nada said.
Alibaba has played down its U.S. ambitions – including any hints that it plans to make a head-on run at Amazon.com Inc. (Nasdaq: AMZN). But whether it admits it or not, Alibaba is one day going to invade the U.S. e-commerce market harder than the Allies hit Normandy and Omaha Beach back on D-Day in World War II.
All you have to do is look at the substantive investments Alibaba has been making in U.S. tech properties for several years.
Several stories in particular tell the tale.
In late 2012, Alibaba Vice Chairman Joe Tsai flew from China to California to talk about taking a stake in Quixey, a venture that makes a search engine for mobile apps. U.S. venture capitalists and institutional investors usually take months to run numbers, conduct their due diligence, and eventually make an investment decision.
But with Alibaba and Quixey, an investment was made within 30 days.
And there have been other stakes taken that hint at Alibaba's ultimate plan for the U.S. market.
In October 2013, for instance, Alibaba paid $202 million for a 39% stake in Shoprunner, a membership-based two-day shipping plan that works with dozens of U.S. retailers in competition with Amazon Prime.
The goal of the investment: to learn about the U.S. e-commerce market and distribution practices – without overtly "exposing itself" to Amazon.
"They can't grow in China forever," Shoprunner Chief Strategy Officer Fiona Dias said in an interview. "They're certainly not going to be invited to play in Amazon or eBay's sandbox. But in an indirect way they can learn and observe from hundreds of large retailers."
One reason Alibaba wanted to go public was to collect billions – in cash or shares – to invest in U.S. technology properties.
"Having a liquid currency is very, very helpful," Tsai, the IPO architect, said back in March. "We'll be sticking very close to our knitting, staying very true to our core business, e-commerce."
And make no mistake: Alibaba knows e-commerce.
And the company plays hardball.
The "Next D-Day"
When measured by the yardstick of gross-merchandise value (GMV), Alibaba is actually the world's largest e-commerce company. And sales are destined to surge: In China, Internet and e-commerce adoption are still well below average. As more folks in China join the Internet realm and e-commerce grows, Alibaba should be able to grow its sales and earnings by 30% a year for the foreseeable future.
In China, Alibaba controls 80% of the e-commerce market – and for good reason: Its business units cover all three of the key areas for sales.
The company's Alibaba.com site is a wholesale business-to-business site. Alibaba's Tmall site fills the same space in China that Amazon.com does here in the U.S. market. And Alibaba's Taobao venture is an Asian-market doppelgänger of America's eBay.
Currently, Alibaba's "marketplaces" have more than 100 million daily users and 280 million active buyers. When you look at Alibaba's extended network of apps and services, it reaches more than 500 million Internet users.
And the tactics it employs – clean tactics, but aggressive – are aimed at maintaining that commanding lead.
A Trillion Here, a Trillion There…
Take "Singles' Day," a special celebration that occurs each year on Nov. 11.
The holiday got its name because the date consists of four numeral "ones" (you know, the month and day are expressed as 11/11), and also because it's a day of celebration for folks who are single – especially young, fashionable folks.
This "holiday" got its start, I believe, back in the early 1990s.
And it's really taken hold.
Young folks organize parties, go out with friends – and spend a ton of cash.
As incomes rise and the observance of this day gains traction, China's retailers have increasingly targeted young spenders, correctly viewing them (and this "event") as a major revenue opportunity.
Online retailers host "sales" – like we do on Presidents Day or Labor Day – and are digging into the usual bag of tricks retailers resort to when trying to encourage spending.
That marketing strategy is working.
On Singles' Day in November 2012, Alibaba's online mall Taobao reportedly sold nearly $3 billion worth of merchandise in a 24-hour stretch.
On Singles' Day last year, Alibaba's online sales alone zoomed 80% to eclipse $5.7 billion – more than three times the "Cyber Monday" sales we had here in the U.S. market. And one researcher said total sales exceeded $8 billion.
Singles' Day is less than two weeks away. And Alibaba is flexing its muscles to make sure it "owns" this celebration of China's youthful nouveau riche.
One motif that's come to represent the Singles' Day holiday is the so-called "Double Eleven" slogan.
Back in mid-October, Alibaba's Tmall.com marketplace sent around a letter warning China's publishers not to run ads with the "Double Eleven" motif that aren't official Alibaba promotions. The basis for Tmall's warning: Double Eleven is a registered trademark owned by Alibaba. In fact, Reuters reports that Alibaba last year registered at least six trademarks based on that slogan with the State Administration of Industry and Commerce.
The warning letter came into public view recently after Alibaba rival JD.com posted it on the Internet. Without identifying any companies by name, Tmall said any media firms that published ads infringing on the trademarks would be held liable.
"We express our extreme indignation and condemn some e-commerce companies for their demeaning activities," the Tmall letter cautioned, though it didn't disclose any examples of those "activities."
Experts think of moves like these when they refer to "market power."
It's the kind of muscle we believe Alibaba will eventually bring to the U.S. market.
And it's the reason we continue to think Alibaba will eventually become the world's first $1 trillion (market-value) company.
Our view is gaining support.
Heavy Hitters Are Coming Around to Our View
After Barclays Plc. (NYSE ADR: BCS) recently initiated coverage on Alibaba with a "Buy" rating, yet another reason to like the Chinese e-commerce giant's stock, CNBC impresario commentator Jim Cramer predicted the stock would shoot to $120 a share in the near term.
Across the board, the Internet retailer's numbers have been "extraordinary," Cramer said on the popular cable channel's "Squawk on the Street" program.
Unlike its looming U.S. competitor Amazon.com, Cramer says the cash-rich Alibaba is making strategic investments – such as a rival of ride-sharing-service Uber.
"One of the reasons why Alibaba has been such a home run is that it's got 40% growth – and sells at 30 times 2016 numbers," Cramer said. "With a 40% rate, these growth guys are willing to pay at least one times growth rate. So you could easily see the stock go to $120, which is what they're really implying."
JPMorgan Chase & Co. (NYSE: JPM) – which just released a 158-page report on Alibaba – has an even more aggressive outlook for Alibaba.
For now, it has a $114 target price.
But in its "best-case" model, JPMorgan says that Alibaba's shares could skyrocket to $178.
"Alibaba has profoundly changed Chinese consumers' purchase behavior, and is one of the most profitable and fast-growing large cap Internet companies globally," the JPMorgan report states. "We believe its sustainable growth outlook and impressive profitability on an already large-scale makes it a highly sought-after Internet asset for global investors."
It gets to the $178 price target by assuming a 41% revenue growth rate through 2018 (instead of "only" 31%, the estimate it uses in its more-conservative financial model).
"We estimate Alibaba will generate 272 billion renminbi ($44.48 billion) total revenue in 2018 under this scenario, which converts to a [calendar year 2015 estimated] valuation of $463 billion (or $178 per share), implying 79% potential upside to the current value," the JPMorgan researchers wrote.
Here are two factors that the investment bank believes will give Alibaba a big tailwind over the next few years:
The e-commerce x-factor in China: Here in the U.S. market, e-commerce plays a "complementary" role. But in China, where online spending will account for 18% of total consumption spending in 2018, e-commerce is a heavyweight force.
Like Apple, Alibaba is more of an "ecosystem" than a company: The Chinese company operates the most sophisticated e-commerce ecosystem in the world, meaning Alibaba should be able to maintain high barriers to entry, a structure that rivals will find tough to copy, cost advantages, and synergies that reach across such "marketplaces" as Tmall, Taobao, and others.
We like the sound of that. And we agree with the assessment.
We'll get a view of how Alibaba is progressing on Tuesday when it reports its first earnings as a U.S. public company. Analysts currently expect the firm to report sales of $2.55 billion for the quarter ended in September, with total calendar year sales rising 43% to $12.1 billion
With bullish sentiment rising in lockstep with a lot of interest from short-sellers, any kind of surprise could launch Alibaba's stock price into a hefty rally.
And longer term, the story will get even more interesting. If you think the U.S. online market is an interesting place to shop now, just wait until Alibaba truly turns its sights on America.
That day is coming – and it'll be like D-Day for U.S. e-commerce companies.
And you'll cash in – as a consumer and an investor.
Source : http://moneymorning.com/2014/11/03/amazons-odds-get-longer-as-d-day-approaches/
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