Hidden Gems: The Rising Stars Within Alibaba’s Vast Empire Revealed and Why Investors Should Pay Close Attention

Once a giant in China’s technology industry, alibaba group (Baba -0.21%) It has fallen from grace in recent years. She faced numerous challenges, including competition and a crackdown by the Chinese government, which affected her performance. And investors are less optimistic about the company’s prospects after the conglomerate achieved its lowest ever growth rate of 2% last fiscal year.

But within the vast empire is a hidden gem that is quietly emerging as the company’s next growth engine.

Image source: Getty Images.

Alibaba’s overseas e-commerce business

Alibaba is generally known for its flagship e-commerce businesses, Tmall and Taobao. But e-commerce empires extend far beyond their home base and primarily focus on two types of business models.

The first part involves cross-border e-commerce businesses operating on AliExpress and Alibaba.com. The former is a global retail marketplace available in 17 languages ​​in addition to English, focused on selling Chinese-made products to overseas consumers.

The latter are wholesale markets that mainly focus on selling products in bulk to overseas customers, especially merchants who resell these products locally. According to Alibaba, in the fiscal year ended March 31, 2023, more than 47 million buyers from more than 190 countries obtained business opportunities or completed transactions on Alibaba.com.

The second part of Alibaba’s overseas e-commerce empire comes from majority stakes in local marketplaces Lazada and Trendol. Lazada is one of the leading e-commerce platforms in Southeast Asia, followed by Shopee. We also operate an e-commerce logistics network in the region, complementing our e-commerce marketplace services. This is similar to the symbiotic relationship between Tmall and Taobao through Cainiao.

On the other hand, Fashionol is Turkey’s leading e-commerce platform in terms of GMV and order volume. Through our e-commerce business, we provide a variety of products and services to consumers and provide local consumer services such as food and groceries. Like Lazada, Fashionol also operates logistics services through Trendol Express and Fashionol Go. Trendol also helps Turkish sellers sell their products across six continents.

Collectively, these companies make up Alibaba’s international digital commerce group. For the first nine months of the financial year ending March 31, 2024, the group achieved revenue growth of 46%, significantly outpacing the group’s overall revenue growth of 9%.

The outlook for international digital commerce is bright

Alibaba’s international e-commerce business may be small. Sales are about one-fifth of Alibaba’s Chinese e-commerce business. But the prospects are vast.

Its relatively small size means it has a lot more room to grow before it reaches the size of its sister companies. Moreover, the overseas e-commerce market is huge and growing. The size of China’s e-commerce industry is estimated to be $2.9 trillion, accounting for about 50% of global e-commerce.

However, as China was the world’s most penetrated e-commerce market in 2023 (approximately 50%), its peers are likely to see higher growth rates in the coming years as they catch up with market penetration. Suffice it to say that the growth opportunities will be enormous as Alibaba’s international e-commerce group focuses on this growing pie.

For example, there has been a recent surge in cross-border e-commerce, led by companies such as Temu (owned). PDD Holdings), Shein and Alibaba’s AliExpress are significant tailwinds that will persist for years. Leveraging China’s extensive supply chains and experience in the country, major Chinese e-commerce platforms are turning to overseas consumers to sustain growth, especially amid increasing competition in China.

Internally, Alibaba has recently reorganized its massive empire into separate (and independent) operating units, giving its international business group the leverage it needs to chart a path to success. Overseas e-commerce divisions can form a management team and board of directors to set long-term strategic direction, make better decisions, and execute faster to win in each market.

Unsurprisingly, this segment recorded the fastest growth among all business groups within Alibaba, with revenue increasing 44% in the quarter ended December 31, 2023. In comparison, the group’s overall sales increased only 5%. This trend may continue in the coming quarters, if not years.

What it means for investors

China’s e-commerce industry has become increasingly competitive in recent years with the rise of new generation e-commerce players such as Pinduoduo and Douying. Alibaba’s e-commerce businesses (Tmall and Taobao) are still its most visible presence in China, but growing in its home base is becoming increasingly difficult.

Not surprisingly, large companies are placing greater emphasis on their international e-commerce operations to maintain their growth ambitions. It wouldn’t be surprising to see this division maintain high double-digit growth rates over the next few quarters (or years). Therefore, investors should pay more attention to this fast-growing business.