Alibaba Group Isn’t Like Amazon And That May Keep It From Winning The U.S.

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Alibaba Group continues to wow investors and advertisers alike, most recently by announcing that it expects its full-year revenue to grow by 45% to 49% year over year for fiscal 2018. Many comparisons have been drawn between the Chinese company and Amazon, although it has repeatedly stated that it isn’t anything like the U.S. online retailer.

Now it seems some are finally starting to understand the differences, but those differences could mean that Alibaba Group will have a difficult time expanding in the U.S.

Alibaba Group target price boosted

In a note dated June 19, Bernstein analyst Bhavtosh Vajpayee reiterated his Outperform rating and said he had lifted his price target for Alibaba Group from $135 to $150 per share.

He highlighted a key difference between Alibaba Group and Amazon, which is how the company pursues and obtains ad revenue. It’s an interesting observation in light of what BMO Capital Markets said earlier this year when he downgraded Alphabet. He was concerned about Amazon encroaching upon Google’s digital ad business. At this time, Amazon’s ad business doesn’t get much attention, although Alibaba has made its ad business a key focus of its earnings reports.

Vajpayee said in this week’s note on Alibaba Group that the company has cashed in on “hard attribution,” which he describes as “the direct causal link between the sale and the advert.”

Fixing one problem but creating another?

The Chinese firm has solved a problem that plagues offline businesses that advertise online, which is that they don’t know how well their ads are working. However, Alibaba has it easier that companies like Facebook or Google because it controls both the ads and the sales, so the vendors on its marketplaces can see clearly the conversion rates on their ads.

As Vajpayee explains, Alibaba Group supports its ad business using “dashboards, unified IDs and a comprehensive profiling of consumer intent,” an approach he says is “unique to Alibaba, at least for now.” But while the good news is that the Chinese firm has solved the issue of linking ads to sales, he notes that this hard attribution and also the company’s narrative in general demands that the growth in gross merchandise volume not be fully severed from growth in ad spend.

Why Alibaba Group may not make it in the U.S.

Amazon’s approach to the digital ad business is different than Alibaba’s, which likely is related to the other differences between the two companies. Alibaba founder Jack Ma has pledged to create 1 million jobs in the U.S., but in a post for Bloomberg, Christopher Balding argues that the company’s business model may prevent it from doing as well as it expects to do in the U.S.

One of his points is how Alibaba Group makes a large portion of its revenue from charging vendors for traffic. He likens the company’s ad business to Google’s in that it allows companies to place ads within search results on its website. So Alibaba earns money first from ads when a shopper sees them and clicks on one and then a second time when the shopper orders the item.

Hands-off approach may not work

He also notes that Alibaba Group tends to take an asset-light model and hands-off approach to keep costs low. The company operates the online marketplaces, but its customers use third-party logistics firms to ship to other customers. Amazon has moved in the exact opposite direction, not only selling goods itself but also enabling third-party vendors to sell by providing all of the infrastructure. Many of these vendors wouldn’t be able to sell online if Amazon did not offer the Fulfillment by Amazon option.

One of Alibaba Group’s long-term goals has been to make it easier for U.S. businesses to do business in China using its online marketplaces, but Balding feels that the hands-off approach will prevent that. Small businesses need a lot of help navigating Chinese regulations and paperwork. Handling logistics all on their own will be too expensive as well. Businesses that struggle to sell online in the U.S. alone would certainly be unable to do everything themselves in China without any assistance.

He also puts everything into perspective in terms of the 1 million jobs promised by Ma. He notes that Wal-Mart has 1.5 million workers and is the biggest private employer in the U.S. Further, if Alibaba Group were able to produce the same amount of revenue per employee as the U.S. big box retailer, it would mean $245 billion in annual exports to China, but total U.S. exports to the country were only $170 billion, making the idea seem further off than the Chinese firm would like investors to believe.

Shares of Alibaba Group slipped by as much as 0.3% to $139.05 during regular trading hours on Tuesday.

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