It's 13F season, when the world's largest hedge funds disclose their biggest holdings.
And this year, some of the world's best investors – George Soros, Dan Loeb, John Paulson, David Tepper, Louis Bacon Moore, Leon Cooperman – all have significant stakes in Alibaba Group Holding Ltd. (NYSE: BABA).
If it wasn't clear before, this makes it official that Alibaba has taken the investment world by storm.
Perhaps even more significant is the fact that, in quite a few cases, Alibaba has been the real bright spot in an otherwise tough year for most of these funds.
Indeed, since coming public at $68 per share on September 18, the stock has rocketed straight up to $111.24 per share, making it the sixth-largest U.S. company by market capitalization – only Apple Inc. (Nasdaq: AAPL), Exxon Mobil Corp. (NYSE:XOM), Microsoft Corp. (Nasdaq: MSFT), Google Inc. (Nasdaq: GOOG, GOOGL), Berkshire Hathaway Inc. (NYSE: BRK), and Johnson & Johnson (NYSE: JNJ) are more highly valued by investors.
By any measure, this is a remarkable run for a company that went public barely two months ago…
But, like the "candle that burns twice as bright," the question is whether Alibaba has come too far, too fast.
The answer is complicated, but our next move is simple…
Alibaba's Unique Business Model Is Its Biggest Strength
Alibaba is China's largest private sector company. It has more than 300 million buyers and 8.5 million merchants who sell almost 120 product categories on its sites.
The company operates a unique combination of Internet businesses that combine an online marketplace like eBay Inc. (Nasdaq: EBAY), an online payments business like Paypal, consumer e-commerce like Amazon.com, Inc. (Nasdaq: AMZN), and a proprietary cloud computing technology called "Alibaba Cloud" that handles the traffic and data management of the company and its partners. It also has a growing financial services business.
Alibaba operates an online marketplace and is not an online retailer like Amazon.com, so it earns money on a net commission basis. Its Taobao Marketplace is free of commission/listing fees and generates most of its revenues from selling advertising.
Taobao has over 95% market share in the consumer e-commerce sector in China while Tmall has 57% of the business e-commerce sector. With a combined 81% market share in overall e-commerce gross merchandise volume, Alibaba is by far the dominant player in Chinese e-commerce.
In sharp contrast to a company like Amazon, Alibaba outsources fulfillment and logistics to its 48%-owned affiliate China Smart Logistics Network, which enables it to keep billions of dollars of costs off its balance sheet and income statement.
If Amazon didn't include its logistics costs in its income statement, it would be much more profitable. China Smart Logistics Network operates a logistics information platform that links up transactional data to that of other logistics partners.
What makes this all so incredible is that the Internet and e-commerce are still in their early stages in China. It's virtually all upside.
With Chinese Internet penetration at only 44% and online retail transactions accounting for only 8% of total Chinese retail sales, it is easy to see why investors are exuberant over Alibaba's future growth prospects.
Monetization of usage is also in its early stages.
The overall monetization rate for Alibaba's China retail marketplace was only 2.55% in its 2014 fiscal year. The monetization rate from mobile phones has been improving to 1.49% in the most recent quarter from 0.98% and 0.58% in the two previous quarters, which are considered relatively low rates that should offer significant upside.
Over such a large base, even small increases in monetization rates could boost earnings significantly.
The bullish case for Alibaba, based on its unique business model, is extremely compelling, and for the moment there is every indication that BABA stock will continue to rally along with the overall market.
Clearly, Alibaba is a company with (nearly) everything going for it.
However, there's a variable in play here that's much more complex, and is, for now, unknowable.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.