Alibaba's Food Delivery Business Growth Can Surprise Wall Street

Seekingalpha2023-12-01

Alibaba has reported 16% YoY growth in its Local Services Group which includes food delivery business.The annualized revenue base of this segment is $8.5 billion and the annualized EBITA loss stands ...

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In the recent earnings, Alibaba's Local Services Group reported YoY growth of 16% with quarterly revenue of $2.1 billion. The EBITA loss for this segment has also reduced by 23% to $350 million which has helped in improving the overall margins. The food delivery business in China is a duopoly between Alibaba and Meituan. In the past few quarters, Meituan has been facing headwinds causing the stock to drop by 40% in YTD. In comparison, Alibaba's stock has declined by only 15% in YTD. In a previous article, it was mentioned that despite some challenges in the spinoff process, we could see a better sentiment towards Alibaba stock due to growth in these segments.Alibaba should gain a strong tailwind as self-driving delivery gains traction over the next few years. The labor cost for food delivery is particularly high due to lower order cost. Autonomous delivery should help Alibaba improve the margins and also lower the cost for customers making the service more affordable leading to a better growth trajectory.Prior to the pandemic, in the September ending quarter of 2019, Alibaba's Local Services Group reported revenue of $950 million. In the last four years, this business has reported CAGR of 22%. If this growth rate continues over the next few years, the annualized revenue could reach $30 billion by 2030. Higher revenue base should also improve the margins which will increase the overall profitability for Alibaba.Strong growth numbersAlibaba's Local Services Group has been able to deliver strong growth numbers in the last few quarters. In the recent quarter, the company reported 16% YoY revenue growth rate which increased the quarterly revenue to $2.1 billion. Higher growth rate in this business helps to provide economies of scale.Company FilingsFigure: Local Services Group reported one of the highest growth rates. Source: Company FilingsIn September ending quarter of 2019, the revenue base of Local Services Group was less than $1 billion. Over the last four years, Alibaba has managed to more than double the revenue rate despite challenges faced during the pandemic. If Alibaba maintains a CAGR of 20% over the next few years, this segment should have annualized revenue rate of $30 billion by 2030. It is likely that the revenue share of this business will also increase as the core e-commerce segment shows slower growth pace.Improvement in marginsFood delivery is a highly labor-intensive service. In the early phase of growth, Alibaba was giving massive incentives to improve customer traction. However, these incentives have slowly been reduced. Higher order numbers also increase the efficiency of the overall system. This has helped Alibaba improve its margins over the last few years. In the recent quarter, Alibaba reported a 23% drop in EBITA loss within Local Services Group. The quarterly loss was $350 million or $1.4 billion on an annualized basis.Company FilingsFigure: Improvement in margins of Local Services Group. Source: Company FilingsRapid growth in revenue and a decline in EBITA loss has helped in improving the margins for this business. In the year-ago quarter, Alibaba reported RMB 3.3 billion EBITA loss on RMB 13.3 billion revenue giving this segment an EBITA margin of negative 25%. In the recent quarter, Alibaba reported EBITA loss of RMB 2.5 billion on revenue of RMB 15.5 billion giving this segment an EBITA margin of negative 16%. Hence, there has been 9 percentage point improvement in margin in the last year.Significant tailwinds for this segmentAlibaba's chief competitor is Meituan which has been facing a number of issues in the past few years. Meituan's stock has dropped by 40% in the YTD. Reduction in competitive pressure should help Alibaba reduce the incentives and improve its market share. Alibaba's ecosystem is also stronger with a number of other services available from a single platform. This should help the company improve customer loyalty and increase monetization of the existing user base.Another major trend within the food delivery business is automated food delivery. The labor cost within food delivery is particularly high compared to e-commerce due to lower order value. Most of the companies have absorbed massive losses in this business in order to limit the additional food delivery cost being passed to customers. Autonomous food delivery through self-driving trucks or drones can significantly reduce the costs and improve unit economics for food delivery companies. Alibaba ramped up its autonomous delivery during the pandemic and this technology is reaching an inflection point in China.Standalone valuation of this segmentAlibaba is planning to spinoff different businesses. There have been a few stumbling blocks in this process but we can look at the standalone valuation of Local Services Group to gauge the impact it will have on Alibaba stock. One of the peer comparisons could be DoorDash, Inc. (DASH) in U.S. The DoorDash stock is trading at a PS ratio of 4.5. The YoY revenue growth of Alibaba's Local Services Group and DoorDash are almost similar while the margins of Alibaba's business are better. If Alibaba's Local Services Group receives a similar PS multiple, it will have a standalone valuation of close to $40 billion due to annualized revenue of $8.5 billion.Ideally, Alibaba's Local Services Group should be able to get a higher PS valuation as it improves the ecosystem of Alibaba and there is a strong halo effect for other services. However, most of the Chinese stocks have been getting a big discount due to geopolitical tensions. Even if we give a very modest PS multiple of 3, the Local Services Group should have a standalone valuation of over $25 billion. This is more than 10% of the current market cap of Alibaba. The long-term growth trajectory of this business is very strong with new technologies helping to reduce the cost and improve margins.YChartsFigure: Comparison of Alibaba and Apple in the last few quarters. Source: YChartsAlibaba stock is trading at a deep discount compared to Apple (AAPL) and other big tech companies when we look at the forward PE multiple. Apple receives close to 20% of its net sales from China and it also faces some of the geopolitical risks associated with Alibaba. Alibaba's international commerce is growing at over 50% YoY growth rate which will reduce the geographic risk for Alibaba stock and also provide a bigger growth runway.The strong growth in Local Services Group and rapid margin improvement will be a key driver for future bullish sentiment in Alibaba stock.Investor TakeawayAlibaba's Local Services Group is showing strong double-digit growth. The recent quarter showed 16% YoY revenue growth and annualized revenue rate of $8.5 billion. The EBITA margin has improved from negative 25% in the year-ago quarter to negative 16% in the recent quarter. It is likely that this segment will reach a break-even point by 2025.Alibaba's chief competitor in this segment is Meituan which is facing a number of headwinds and has seen its stock plunge by 40% YTD. New autonomous delivery technologies should significantly improve the unit economics of this business and also help in improving the revenue growth rate. Despite geopolitical tensions, Alibaba stock is quite cheap when we look at important growth segments and the rapid increase in revenue share of international market.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":2,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2387440466"}