Financial Analysis of Alibaba Group
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Yue Jin
Finance 620
Midterm
05/29 2017
Financial analysis of Alibaba Group
Alibaba is an e-commerce company that provides consumer-to consumer, business-to-consumer and business-to-business online sales. It was founded in Hangzhou China in 1999 and was traded publicly in NYSE in 2014. Alibaba’s IPO in NYSE raised over 25 billion—the largest IPO in history. Alibaba’s current market capital is near 310 billion, which makes it one of the largest retailer in the world. Its online sales and profit surpassed all US retailers, like Amazon and eBay. (Tong, 2017). Alibaba’s three main web portal Taobao, Tmall and Alibaba.com host millions of users and merchants, by which 80 percent of China’s online shopping market is dominated. (Lajoie & Shearman) Also, Alibaba has an integrated business system. It has its own payment services, logistics, cloud computing, and social media served for its users.
Alibaba recently struggled with the “counterfeits” issue. Quality of products sold on its websites cannot be guaranteed as they are described. Many of its users have the experience of buying a fake product and gradually these websites have lost consumers’ trust. That may be a crucial reason that Alibaba is facing a difficulty in expanding its North American market. Its market share in consumer to consumer e-commerce in U.S. is much smaller than its competitor Amazon, whose market share has reached 43%. It is significant for Alibaba to rebuild its supervision system to its vendors and gain consumers’ trust back. There is some potential feasible way that Alibaba could battle fakes is to enhance the regulation about the product description; inspect some “suspicious” transactions like “5 hundred for a Rolex watch or 2 hundred for a Louis Vuitton’s handbag”. On the other hand, simplify its return policy and fasten its logistics once users receive counterfeits. Brand reputation are crucial in today’s global market and it is time for Alibaba to come up with a considerate strategy to build it.
One of Alibaba’s competitive advantages is financial services. Alibaba is the frontier of financial service. It provides concise and easy-to-use mobile payment system Alipay, which is similar with Apple Pay but is announced earlier than Apple Pay. User can use their “digital wallet” to buy movie tickets, pay for a taxi or even invest in a money-market fund called Yu’e Bao. At the beginning, Alibaba promoted its financial service on its online sales websites like Taobao. As those e-commerce portals generated millions of users, they made a great mediate effect for Alipay and Alipay rapidly gained market acceptance. For instance, currently 60 percent of transactions made in Taobao are through Alipay and its Yu’e Bao has already collected $87 billion in assets. (Lajoie & Shearman) That large amount of money in Yu’e Bao even make China’s banks and regulators alarmed. Furthermore, Alibaba declares that number double or even triple in next decade. The numerous cash and wide acceptance of Alipay will be an advantage towards Alibaba’s business operations.
To acquire more information about Alibaba’s performance, we need to analyze its financial statement like balance sheet (Exhibit 1), income statement (Exhibit 2) and cash flow statement (Exhibit 3) from financial perspectives.
The income statement showed that Alibaba’s Revenue for 2016 was $15,686 millions, which was nearly doubled from 2014. Revenue for 2014 is 52,504 million in Chinese yuan, probably 8,152 million in dollar, using the exchange rate 6.44 at that time. This incredible change gave the credit to its successful promotion its C2C and B2C online sales portals Taobao and Tmall. These two websites generated 27% more in sales than last year after Alibaba increasing its marketing expenses for 148% from last two years (from 4,545 million yuan to 11,307 million yuan) (Tong, 2017) Alibaba created its own festival, the online shopping day on Chinese Singles’ Day (November 11th). It promoted Taobao or Tmall through its own website yahoo.com.cn. Apparently, those marketing strategies succeeded and Alibaba gained 11,056 million net income in its just-concluded fiscal year, nearly tripled its profit from the prior year. “Alibaba’s $11.056 billion in profits is 55% greater than the combined profit in the most recent fiscal year of the world’s largest retailer by sales, Wal-Mart Stores Inc. ($4.57 billion in profit), the world’s largest online retailer by web sales, Amazon.com Inc. ($596 million), and North America’s leading online marketplace operator, eBay Inc. ($1.947 billion.)”(Tong, 2017)
The total assets are 56,350 million for 2016, increased 35.67% comparing with data of 2015. This attributes to a large increase on Long term investment, from 7,821 to 18,686 in million. The increase in total stockholder equity is dramatic, from 23,459 to 33,550 in million. The growth is near 43%. 2016 was a profitable year for Alibaba and its retained earnings grew more than 200% from 4,007 to 12,176 in million. The change in cash and cash equivalents for Alibaba in 2016 was -213 million. The negative free cash