Alibaba: Strategic Shift to Taobao Puts Pressure on Earnings, but Long-Term Benefits Likely

According to a media report from LatePost on June 19, Alibaba’s BABA management may allocate more resources to Taobao, smaller merchants, and value-for-money products versus Tmall, which houses larger merchants and brands. We believe such a strategy places near-term earnings pressure on Alibaba, but it should boost Alibaba’s long-term competitiveness and supports our wide moat rating. Pending additional details, we maintain our fair value estimate and our earnings forecast for Alibaba is unchanged.

We suspect the move to focus on Taobao could shift a larger share of traffic, which is the exposure of the merchandise to users, to Taobao. According to our estimate, advertising from brands may decline, which could hit some ad revenue in the near term. In the long run, we think there is room for small merchants to increase monetization as we see PDD Holdings raising its take rate to an estimated 3.80% in 2022 from 2.99% in 2019. PDD will face stronger domestic competition from Taobao than from JD.com, as PDD and Taobao have strong experience working with smaller merchants in our view.

Alibaba’s organizational structure is likely to be flatter, according to the report, which mimics JD.com’s move. We expect to see a faster reaction to changes in the market, which should be positive for Alibaba’s market share in the long term. Further, should there be any meaningful layoffs, we expect it to be positive for the margin in the near term. Time spent on the app and the number of daily active users will be more important key performance indicators compared with gross merchandise volume and monetization. Therefore, staff will need time to adjust their focus and goals, which may put pressure on earnings in the near term, similar to what we expect at JD.com. We also think it will take time for customer stickiness to occur and translate into monetization. This will hit GMV and monetization in the coming year, but we think Alibaba should see a slower market share loss after a year.