Alibaba (NYSE:BABA) shares are trading up an incredible 95% year to date. While a few critics, like short-seller Jim Chanos, think the Chinese e-commerce giant's 56% increase in revenue is a little too good to be true, a peek behind the curtains of the company shows why this type of growth is possible.
Alibaba is often called "the Amazon (NASDAQ:AMZN) of China" because it's a quick way to describe the dominant e-commerce player located in the world's most populous country. But Alibaba is much more than an online retailer. If you want to know why Alibaba can confidently forecast 45% to 49% revenue growth for the next year and a $1 trillion gross merchandise value (GMV) target for 2020, you have to do a little digging.
1. Alibaba has a stake in a delivery logistics company.
Alibaba owns 47% of Cainiao, a logistics affiliate that was founded in 2013. The company helps connect delivery partners, warehouses, and merchants for speedy deliveries.
Cainiao helps with deliveries in 224 countries and regions worldwide. In early August, Alibaba gave customers a look inside Cainiao's intelligent warehouse, which uses smart robots that can move packages weighing up to 500 kilograms.
Cainiao was valued at $7.7 billion in its last funding round in early 2016.
While Amazon is famous for its quick delivery, too, Amazon prefers to control its delivery system rather than entrust a company similar to Cainiao. Amazon even has its own planes and drones to help with deliveries. This goes back to Amazon CEO Jeff Bezos' tendency to want to own and control all aspects of his company vs. Alibaba founder Jack Ma's tendency to work with companies to accomplish his end goal.
2. Alibaba is transforming grocery stores and department stores in China.
Before Amazon and Whole Foods, there was Alibaba and Lianhua Supermarket. Alibaba has a 32% stake in Sanjiang Shopping Club Ltd. and an 18% stake in the Lianhua Supermarket chain, and has been updating their checkout process and layout over the past few years.
Alibaba vice chairman Joe Tsai said on the company's latest earnings call that the company must have a brick-and-mortar retail presence because online retail still only makes up about 15% of China's total $5 trillion retail market. The other 85% is still happening in physical retail locations.
The company also founded Hema supermarket in 2015 to demonstrate how technology can make grocery shopping a more pleasant experience for customers. Sales per unit at Hema stores are 3-5 times higher than those at traditional supermarkets, the company said.
3. Alibaba's Taobao platform has become a hub for content in China.
One reason why Alibaba is boasting 56% revenue growth over the past year vs. Amazon's 25% revenue growth is that Alibaba has made its Taobao Marketplace platform in China a miniature social platform.
Users can share product reviews, or watch webisodes and live-streams of makeup or cooking tutorials. Creating content that users engage with is important, as Alibaba CFO Maggie Wu said in the last earnings call that the longer people stay on its platforms, the more money they spend.
Mobile monthly active users (MAUs) for its China retail marketplaces reached 529 million in June, up 22 million from the past quarter.
4. Alibaba wants U.S. small businesses to start selling products on its China platforms.
Alibaba is trying to work on a win-win deal with U.S. small businesses. By selling goods on Alibaba's platforms, U.S. small businesses can increase sales and create jobs to deal with the increase in sales, while Alibaba will benefit from more customers and a wider selection of goods.
In June, Alibaba held its two-day Gateway '17 conference in Detroit, Michigan to teach 3,000 entrepreneurs, small business leaders, and farmers from 48 states about how to sell on Alibaba's platforms, and why it's worth the extra effort.
The bottom line is that China has the largest population in the world with about 1.4 trillion people, and U.S. businesses would be crazy not to sell to them, especially when Alibaba wants to make it as easy as possible.
5. Alibaba is under an ongoing investigation by the SEC.
Remember when I mentioned that short-seller Jim Chanos is weary of Alibaba's incredible success over the past few years? Apparently, the Securities and Exchange Commission (SEC) had reason to question the success, too.
Alibaba first announced the ongoing investigation by the SEC into its accounting practices in May 2016. However, an investigation by the SEC doesn't mean Alibaba has done anything wrong with its accounting. For now, it's just a checkup. For the record, when the investigation was first announced, the majority of analysts noted that they didn't see it as a big deal, just a way for the SEC to better understand Alibaba's business model.
For a growth comparison, Alibaba reported 56% revenue growth over the past quarter, to $7.4 billion, while Amazon reported 25% revenue growth, to $38 billion. Of course, the two companies have different business models and are at different points in their growth timelines, but the difference is still striking.
The last update to the investigation came in November 2016, when Alibaba denied the reports that said a top Alibaba executive was working with federal regulators to help them with their review of the company's accounting practices. According to Alibaba, the investigation is in reference to three things: the accounting for its Cainiao Network, the operating data from its annual sales day on November 11 known as "Singles' Day," and the accounting of related-party transactions.
If the SEC were to find something they didn't like in Alibaba's accounting, the company would have to issue a restatement of its numbers, which could hurt its reputation and, in turn, its stock.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.