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Alibaba: The Battle Enters Decisive Point
May 27, 2018 6:09 pm|Comments (0)

Alibaba’s (BABA) Ant Financial plans to raise fresh funds at a valuation of $ 150 billion, but it faces a number of headwinds. Alibaba recently suffered a setback when Walmart (WMT) dropped Alipay from all its stores in Western China. This step could be followed by a nationwide rollout in which all the Walmart stores in China accept only Tencent’s Tenpay. Walmart has 443 stores in China which include 406 Supercenters, 18 Hypermarkets, and 19 Sam’s Clubs.

Both Walmart and Tencent have a big stake in JD.com (JD), which is Alibaba’s biggest competitor in China. As the Chinese retail ecosystem is being fought over by Alibaba and Tencent, both big and small retailers have had to choose between either of the two goliaths. Tencent has some major advantages in this market which it is using to increase its market share.

According to a recent disclosure, Ant Financial Services group’s wealth management business has Rmb 2.2 trillion or $ 385 billion of assets under management. It has 600 million users. This makes it the biggest customer wealth management platform in the world. There are other financial products which can be introduced by Alibaba to maximize the potential of its payments ecosystem. If Alibaba is able to retain its market share in this very important segment, we should see huge upside potential for the entire platform and the stock.

Tencent makes up for its late entry

Tencent was quite late in entering the payments market. Alibaba’s Alipay has been used since 2004. By early 2014, Alipay had a 70% market share in China’s online payment market. But this has changed significantly in the past few years. Recent estimates by Beijing-based consultancy iResearch show that Alipay has 53% market share where Tenpay is close on its heels with 40% share.

Source: WSJ

The stakes for both Alibaba and Tencent are quite high. China is seeing a rapid increase in transaction volume through mobile payment as customers move away from bank cards and other payment options.

Source: WSJ

This means that over the next three years, we will not only see a doubling of total transaction volume but also a much higher share of mobile payments within the overall pie. Both the companies have realized the importance of this segment and are going full throttle in their expansion initiatives. Alibaba is at a minor disadvantage in this battle because all its competitors are moving under Tencent’s banner. Hence, even though Alibaba has a greater market share and a good growth runway due to its rapidly growing retail operations, it still needs to compete against a growing list of retailers that have started using Tenpay.

Tencent also has other advantages besides the fact that it is the only company which can challenge Alibaba. As the urban market gets saturated by payment options, both Alibaba and Tencent have started moving into rural areas. In these areas, Tencent already has a big customer base due to its WeChat application. Most of the potential customers for Tenpay would have already used WeChat and hence using the payment platform is a mere extension of the core app. On the other hand, the use of Alibaba’s e-commerce platform is not as widespread in rural parts as it is in urban areas.

Launch of new financial products

The payments market is just the beginning for Alibaba and Tencent. As they get greater customer data, they will be able to gauge the creditworthiness of a customer and provide tailor-made financial products using data mining. This can extend from loans and insurance to more exotic products. All these segments have much higher margins and significant growth potential within China. It must be noted that most of the customers in China skipped the entire credit card growth phase and have now settled with Alipay and Tenpay.

Source: FT

Alibaba formed Yu’e Bao in 2013 to manage the leftover cash from spending on its e-commerce platform. By 2017, this money market fund had amassed $ 165.6 billion under management. This number is now closer to $ 385 billion according to recent disclosure by the company. The rapid growth of this fund shows the future potential of Alibaba’s financial division and the innovative financial products it can bring to the market. The future growth in these products will closely follow the market share of Alibaba and Tencent within the payments ecosystem. Hence, it has become extremely important for Alibaba to defend its turf and build a strong moat.

The payments battle is not limited to China but extends in almost every part of the world. For example, Alibaba has a huge stake in Paytm which is the biggest payments player in India. This company has seen rapid growth in the last 30 months. It is highly possible that Alibaba is able to gain a decent footprint in the payments ecosystem of developed markets over the next few years. In order to avoid regulatory pushbacks, Alibaba is more likely to invest in unicorns and promising startups in developed countries instead of growing its own platform. A similar approach in India has allowed Alibaba gain a strong foothold through investments in Paytm and online grocer Big Basket.

What to expect in the next few quarters?

Alibaba’s “New Retail” initiative was a response to the expansion of Tencent/JD within offline retail. Alibaba has already made some big-ticket investments in brick and mortar stores. These include $ 2.9 billion investment in Sun Art, $ 2.6 billion in InTime and $ 4.6 billion in electronics retailer Suning. In February, Alibaba made RMB 5.45 billion or $ 867 million investment in Easyhome Furnishing for 15 percent stake. This pace of investments should continue for the next few quarters. Some of these are defensive purchases which are made to prevent future acquisition by Tencent.

We should also see a negative impact on the margins as more incentives are given to customers to lure them. When Tencent announced its recent earnings it mentioned that the company would “aggressively” invest in video and payment, which may hurt margins. This warning was enough to send the stock sliding down by 4.6% even though the net profit beat estimates.

A similar trend is possible within Alibaba which can lead to lower margins, even if the revenue growth is high. Alibaba also needs to make bigger investments in digital segment because it does not have a core social app like Tencent which can retain customers within its ecosystem.

Investor Takeaway

Alibaba has a decent lead over Tencent in the payments market. Also, Alibaba’s market share in payments is closely following the market share of the company within e-commerce. The penetration level of financial products in China is still quite low compared to U.S. and Western Europe. Alibaba can use its ecosystem to attract customers to new financial products and also use its market leadership to build a better moat against rivals.

Although we could see some margin contraction in the next few quarters, the long-term growth story for Alibaba is intact. Alibaba is a good buy-and-hold option for investors with long-term horizon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Robotics tipping point: What business leaders and entrepreneurs need to know NOW (webinar)
November 9, 2015 3:00 am|Comments (0)

robots

VB WEBINAR:

Join us for this live webinar on Friday, September 25 at 10 a.m. Pacific, 1 p.m. Eastern. Register here for free. 

Silicon Valley is at the center of the perfect storm of robotics.

It’s at the center of the talent, the investment and the research, the center of the software and hardware industries — all key ecosystem components to build the robotics companies that need to rise to serve the world’s future.

But the event horizon to make that happen is something that needs to be considered in terms of decades, not the typical start-up timelines of a few months to a few years, according to Andra Keay. Keay is managing director of Silicon Valley Robotics, and one of the panelists in this upcoming webinar that will be shedding light on what businesses need to know now to take advantage of the evolution that’s reaching a tipping point.

“Robotics moves slowly but it’s been around a long time,” she says. “The industry has done a great job over the last 50 years of helping us to envision what uses we could make of robots and what that could mean to the quality of our life and our economy. Yet, few of those promises have yet been met.”

The problem, according to Keay is that our expectation of robotics has been inflated.

“We did it wrong. We’ve created this situation where we look at robots as humanoid,” Keay says. “There’s no way that robots have anything like the capability of a person. It’s just absolutely impossible in this century for a robot to replace a human in anything.”

That’s not to say that robotics technology isn’t already very much a part of our lives, or that now isn’t the right time for the industry to become more established and scale.

“Five years ago in the industry we said, OK, the time is right,” Keay says. “It’s clear that robotics is at a point where it’s time to move into new areas. Out of industry, out of research labs, into the service industry and into the home.”

Robotics technologies are well engrained in certain industries, like automotive. It’s just that, for the average person, it doesn’t feel like something that’s particularly close to home. For this reason, it’s easy for people to dismiss robotics as science fiction because it seems so far away and the tipping point moments so elusive.

Understanding what that future may actually look like comes back to understanding the technological and economic drivers that are making robotics peek right now.

Don’t miss out!  Learn more about Andra Keay’s vision for the future of robotics by tuning-in for the webinar “How robotics will change everything, including your business.”

Register here for free.

“In many cases it will be taking this ubiquitous connectivity that mobility computing delivers and making a gradual transition to products that are just that much more powerful and versatile,” Keay says. “It’s not going to be a disruption, but once in a while one of those devices will change in how we use it and that will lead to other changes. I think that, with time, robotics will account for the same kind of seismic shift that the internet and computers had in the 20th century.”

One popular belief is that the growth of robotic technology will inevitably equate to the loss of human jobs. But Keay says there is good reason to believe that the opposite will be true.

“Everywhere I look there are industries that have increased the number of robots that they employ. They’ve also increased the number of people that they employ,” she says. “An exciting vision of the future is that of the skilled mobile tradesperson. They’ll still drive a pickup or an SUV but instead of a leaf blower, or a power tool, they’re working with smarter tools that are used in applications to take care of robots.”

Keay sees a correlation between this future of robot builders and technicians and the opportunity to create small, regional pockets of highly-specialized, entrepreneurial manufacturers and service providers of a variety of stripes to support niche industrial and commercial requirements for robotic technology. “Robots increase the number of jobs that are needed and they also increase the productivity of a company that allow it to expand and create even more jobs,” she says. “That will create opportunities for a new class of entrepreneurs.”

Ultimately, the future of robotic technology means creating machines that augment, not replace, humans and socializing the idea that people can work with robots in an integrated fashion.

“Some of those fences are starting to come down as computing power and intelligent algorithms lead us to a better understanding of how people can work alongside robots,” Keay says. “To make a significant impact on our economy, we need to build a lot of robots because there are not that many out there today.”

“People need to build them and people need to maintain them and the only way we can do that is to create opportunities for the industry to grow in Silicon Valley and elsewhere.”

What you’ll learn:

  • The key consumer and commercial applications of robots and drones
  • The role robots will play in societies and economies
  • How smartphone technologies will pave the way to robotics’ future
  • How cognitive technologies will transform our lives and business
  • The foundation of many IoT applications in shaping the way to robotics

Speakers:

Jim McGregor, Principal Analyst, Tirias Research
Andra Keay, Managing Director of Silicon Valley Robotics
Anthony Lewis, Senior Director of Technology, Qualcomm
Maged Zaki, Director of Technical Marketing, Qualcomm Technologies, Inc.

This webinar is sponsored by Qualcomm.



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