Once a giant in the Chinese technology industry, Alibaba Group (BABA 0.59%) has fallen from grace in recent years. It faced numerous challenges, such as competition and the crackdown by the Chinese government, which impacted its performance. And after the conglomerate delivered its weakest growth -- 2% -- in the last fiscal year, investors aren't too optimistic about its prospects.
Yet, within its vast empire lies a hidden gem quietly emerging as the next growth engine for the company.
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Alibaba's overseas e-commerce business
Alibaba is generally known for its flagship e-commerce businesses, Tmall and Taobao. But its e-commerce empire goes well beyond its home turf, focusing mainly on two types of business models.
The first part relates to cross-border e-commerce business operating under AliExpress and Alibaba.com. The former is a global retail marketplace, available in 17 languages besides English, focusing on selling products from China to overseas consumers.
The latter is a wholesale marketplace focusing mainly on selling products in bulk to overseas customers, especially merchants who resell these products locally. According to Alibaba, over 47 million buyers from over 190 countries sourced business opportunities or completed transactions on Alibaba.com in the year ended March 31, 2023.
The second part of Alibaba's overseas e-commerce empire stems from its majority ownership in local marketplaces Lazada and Trendyol. Lazada is one of the leading e-commerce platforms in Southeast Asia, behind the leader, Shopee. It also operates an e-commerce logistics network in this region, complementing its e-commerce marketplace offerings, similar to the symbiotic relationship between Tmall and Taobao with Cainiao.
Trendyol, on the other hand, is the leading e-commerce platform in Turkey in terms of GMV and order volume. It serves consumers with a broad selection of products and services through its e-commerce business and offers local consumer services such as food and groceries. Like Lazada, Trendyol also operates its logistics service under Trendyol Express and Trendyol Go. Trendyol also helps Turkish merchants sell across six continents.
Collectively, these businesses form Alibaba's International Digital Commerce Group. In the first nine months of the fiscal year ending March 31, 2024, this group delivered a 46% increase in revenue, significantly outpacing groupwide revenue growth of 9%.
International digital commerce has bright prospects
Alibaba's international e-commerce business might be small -- its revenue is around one-fifth of the group's China e-commerce business -- but its prospects are vast.
Its relatively small size means it has significantly more room to grow before reaching the size of its sister companies. Besides, the overseas e-commerce market is massive (and growing). For perspective, the Chinese e-commerce industry is estimated at $2.9 trillion, accounting for around 50% of global e-commerce.
But as China was the world's most penetrated e-commerce market in 2023 (about 50%), its peer countries will likely see higher growth rates in the coming years as they catch up on market penetration. Suffice it to say that the growth opportunities should be tremendous for Alibaba's international e-commerce group as it focuses on this growing pie.
For instance, the recent surge in cross-border e-commerce led by companies like Temu (owned by PDD Holdings), Shein, and Alibaba's AliExpress is a significant tailwind that will remain for years. Leveraging the extensive supply chain in China and their experience in China, leading Chinese e-commerce platforms turn their attention to overseas consumers to sustain growth, especially as competition in China intensifies.
Internally, Alibaba's recent reorganization of its massive empire into separate (and independent) operating units provides the international business group the leverage it needs to chart its path toward success. With its management team and board in place, the overseas e-commerce business unit can set a long-term strategic direction, make better decisions, and execute faster to win in its respective markets.
Unsurprisingly, this segment reported the fastest growth among all the business groups within Alibaba, with revenue up by 44% in the quarter ended Dec. 31, 2023. Comparatively, groupwide revenue was up by just 5%. This trend could continue in the coming quarters if not years.
What it means for investors
The Chinese e-commerce industry has become hyper-competitive in recent years thanks to the rise of next-generation e-commerce players like Pinduoduo and Douying. While Alibaba's e-commerce businesses (Tmall and Taobao) remain the most prominent player in China, it is increasingly more difficult for them to grow on their home turf.
Understandably, the conglomerate is emphasizing its international e-commerce business more to sustain its growth ambitions. It will not be surprising for this business unit to sustain its high-double-digit growth rate in the next few quarters (or even years). Investors should, therefore, start paying more attention to this rapidly expanding business.
