Alibaba Stock Forecast: Alibaba’s Takeover Of Lazada Will Bear Fruit

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First

Alibaba Stock Forecast

Summary:

  • Alibaba’s $1 billion investment to take control of money-losing Lazada is turning out very well.
  • Lazada remains the top e-commerce site in Southeast Asia. Lazada’s site is the no.8 most-visited in the Philippines.
  • Lazada is using cheaper delivery service providers in the Philippines. This helps the company save money.
  • Alibaba is now introducing Alipay in Indonesia.
  • Lazada has also teamed-up with Citibank. Citi card holders in Southeast Asia can now get up to 15% discount on Lazada on select days.

Alibaba’s (BABA) $1 billion investment to take control of Lazada is Jack Ma outplaying Bezos in Southeast Asia. There are now 600 million e-commerce customers in Southeast Asia that Alibaba (and not Amazon (AMZN)) can exploit. Lazada is Southeast Asia’s biggest e-commerce operator. Amazon got too busy building its operations in India that it got outplayed by Alibaba in taking control of Lazada.

Lazada went big on Southeast Asia e-commerce in 2012 when Alibaba and Amazon kept ignoring it. Decelerating growth in North America and China’s economies means Southeast Asia and India are the next growth opportunities for e-commerce leaders like Alibaba. Amazon is still struggling in India against Flipkart and Snapdeal. Alibaba bought the e-commerce leader in Southeast Asia.

It is my fearless forecast that Alibaba/Lazada will prosper in Southeast Asia while Amazon will continue to trail Flipkart in India. With Lazada’s help, Alibaba can dominate Southeast Asia’s internet economy. Alibaba can bring its Tmall/Taobao products and partner vendors to Lazada’s six Southeast Asia websites.

Temasek and Google (GOOG) published a report predicting that Southeast Asia’s internet economy will grow to a $200 billion industry by 2025. Alibaba can benefit from the 32% CAGR in Southeast Asia’s e-commerce market. Temasek and Google estimates that the e-commerce market in Southeast Asia will be worth $88 billion to $120 billion by Year 2025.

Alibaba Stock Forecast

(Source: Google/Temasek)

Alibaba’s takeover of Lazada is also helping expand the total addressable market for Alipay. Lazada Indonesia is launching Alipay. The Lazada Group already has its own digital wallet service called HelloPay. However, Alibaba’s takeover means HelloPay will give way to Alipay.

In other words, Lazada is going to help Alibaba make Alipay more competitive against PayPal’s lingering domination in Southeast Asia. Alipay’s future is now better after all customers of Lazada’s six websites starts replacing PayPal as their main digital wallet for online shopping.

The Lazada Group has also recently teamed-up with Citi Group (C). Residents of Southeast Asia who owns Citi credit and debit cards can get 15% discount on Lazada purchases on regular selected days. This is big boost in attracting the usually affluent people who are Citi card holders.

It is true that Lazada, who pioneered Cash-on-Delivery e-commerce style, is democratizing e-commerce to serve everyone. However, making Lazada profitable calls for it to attract the purchasing power of the middle-class and affluent population of Southeast Asian countries.

How Alibaba Is Streamlining Lazada

I am a happy customer of Lazada Philippines for many years now. Established only in 2012, Lazada has gobbled up 80% of the Philippines’ e-commerce industry. The comparative chart from SimilarWeb below easily illustrates how Lazada has tremendously defeated eBay (EBAY) in the Philippines.

Alibaba Stock Forecast

(Source: SimilarWeb)

 

But of course, this success was largely due to its free shipping and Cash-On-Delivery features. After Alibaba’s takeover of Lazada, the management has decided to use cheaper delivery services like 2GO Express to deliver most of its products to the far-flung areas of the Philippines.

2GO Express is much cheaper than Lazada’s old main delivery partner LBC. Unlike LBC, 2GO Express can afford to offer lower shipping fees because it franchises its parcel delivery network. These franchised 2GO outlets are located in cheaply-rented locations and they usually employ contractual employees with no benefits. In short, Lazada is making substantial savings on delivering the products it sells by using 2GO Express.

Lazada Philippines has also noticeably cut down on its online advertising on Facebook (FB) and other websites. I am a voracious user of Facebook and Lazada seems to have greatly reduced its use of Facebook’s Sponsored Content Ads platform since June.

Lazada Philippines still gets 30.57% of its traffic from its display ads. However, Facebook now only contributes 12.2% of its site traffic. This might be Alibaba’s way of reducing Lazada’s previous dependence on the pricey ads of Facebook.

alibaba

(Source: SimilarWeb)

Based on the chart above, Lazada is apparently getting increased traffic from 4shared.com. File hosting site 4shared obviously has cheaper ad rates than Facebook. My point is that Lazada is already famous enough that it can afford to reduce its reliance on the web traffic of Facebook ads.

Conclusion

The Lazada Group is not yet accretive to Alibaba’s bottomline. However, I expect this leader of Southeast Asia e-commerce to eventually become a contributor to Alibaba’s profit income statement within the next three years.Making some net profit is likely not yet the top priority of Alibaba for Lazada.

I believe Jack Ma is giving enough time to the new management of Lazada Group to implement cost-cutting measures. The most important thing now is that Lazada got $1 billion cash infusion from Alibaba so that it can continue expanding its operations.

Southeast Asia has 11 member countries but Lazada only operates on the six biggest countries. Going forward, Alibaba’s cash will eventually help Lazada Group expand its business to cover all 11 member countries of Southeast Asia.

I rate BABA as a Buy. The algorithmic forecasts of I Know First is neutral on BABA. However, my gut feeling is telling me that Alibaba is still worth adding to your long-term portfolio. Alibaba is on the right track in focusing on Southeast Asia instead of it trying to compete with Flipkart in India. In my book, Southeast Asia’s 600 million residents are also very importance source of e-commerce growth.

Alibaba Stock Forecast


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