Alibaba Group Holding Ltd. (BABA, Financial) is a dominant force in Chinese e-commerce that continues to deliver superior results.
On Nov. 5, the company reported $17.97 in earnings per share for the last quarter, exceeding analysts' estimates. Sales came at $155.06 billion, which also blew away expectations.
Alibaba has plenty of "moats" to defend its position in the Chinese market. One of them is economies of scope, the cost savings arising from offering different products through the same sales channels.
Then there's economies ofscale, the cost savings that come with a larger volume of sales.
And there are economies on networking, the benefits associated with a growing base of users of a product or service. The larger the number of users, the more valuable the product or service becomes.
These advantages have helped Alibaba rise to compete with the mighty Amazon.com Inc. (AMZN, Financial).
Key metrics: Alibaba versus Amazon
| Company | Alibaba | Amazon |
| 3-year Revenue Growth (%) | 45 | 25.6 |
| 3-year EBITDA Growth (%) | 38.1 | 42.2 |
| Operating Income Growth (%) | 18.83 | 5.72 |
Source: Compiled from GuruFocus as of Nov. 5, 2020.
Key metrics: Alibaba versus Amazon
| Company | ROIC | WACC | ROIC-WACC |
| Alibaba | 9.99% | 8.15% | 1.84% |
| Amazon | 11.37% | 8.46% | 2.91% |
Source: Compiled from GuruFocus on Nov. 5, 2020
But Alibaba has two weak spots that may undermine its dominance in the e-commerce market.
One of them is the spoiling of the cozy relations it has enjoyed with government bureaucrats and party bosses—the people who decide who will be in what business and for how long.
The canceled Aunt Group initial public offering attests to this reality of doing business in China.
The other weak spot is the uneven distribution of the benefits across members as Alibaba's network grows in size.
Some members may get many benefits, while others have very little or none at all, a gap that could undermine Alibaba's network cohesion and provide an opening for upstarts to grab a piece of the market.
Alibaba knows about this weakness of networks too well.
That's how Alibaba's Taobao site beat eBay Inc. (EBAY, Financial) in China back in the early days when Alibaba was a startup and eBay an industry giant.
"When eBay first entered the Chinese market, e-commerce was in its infancy," Hanna Halaburd and Felix Oberholzer-Gee wrote in "Limits of Scale," which was published in the April 2014 edition of the Harvard Business Review. "Thanks to strong network effects, eBay's platform became an increasingly attractive place to buy tech products."
"Taobao's Chinese executives recognized that the company couldn't compete for head-on with e-Bay in the existing market. Instead, they focused on an emerging segment of online auction customers—people on the hunt for clothing and consumer products. Although eBay had a leading position in overall market share, its share of the new segment—which could come to dominate e-commerce in China—was far less imposing. What's more, eBay's strong position with techies was no help at all in attracting fashion-focused customers, who were more interested in whether other fashionistas used the site."
We all know what happened next. Alibaba is now ranked among the world's largest online retailers.
However, it may also find itself in the same corner where eBay once was - providing startups an opening for chipping away at its market dominance.
The spoiling of relations of the company with government bureaucrats may help this scenario unfold sooner rather than later.
Disclosure: I have no position in Alibaba.
Read more here:
- Qualcomm Has Found Its Magic Again
- The Real Reason Chinese Regulators Killed Ant Group's IPO
- Clorox: A Stock for Good Times and Bad
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
