Alibaba (Part 3): A Financial Overview of Alibaba Group

In Parts 1 and 2 of our Alibaba series, we introduced the history and key business segments that constitute the Alibaba Group ecosystem.

In Part 3 here, we provide a financial overview of the Group through a series of stylized facts and explanations.

In Part 4, we discuss the future of Alibaba Group.

Alibaba Series Roadmap

Note: Alibaba Group's fiscal year ends in March, so "fiscal year" in our Alibaba series refers to the year ended March 31st, while "1H2022" refers to the six months ended September 30th, 2021.

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Total Revenue, Operating Income, and Net Income

We start off with a series of stylized facts and explanations that capture Alibaba's key financial metrics.

#1: Alibaba's Total Revenue Has Been Growing at a CAGR of 31.4% During 2017-2021

Alibaba's total revenue has been steadily increasing year on year at a compound annual growth rate (CAGR) of 31.4% over the past five years.

#2: The Group's Operating Income Has a More Bumpy Trend with Occasional Drops Due to High Costs of Revenue

Alibaba's cost of revenue has increased from 38% to 59% of total revenue from 2017 to 2021, with a particularly significant jump going from 2018 to 2019. Management explains that the jump (and increase over the past five years as a whole) is primarily due to an increase in logistics costs related to the on-demand delivery service provided by and fulfillment services provided by Cainiao Network, as well as higher inventory costs associated with Alibaba's new retail businesses.

#3: Alibaba Expects Increasing Costs of Revenue as the Group Continues to Expand its Scope of Business

Management reiterates each year that as the Group continues to invest further in "new retail, direct selling, globalization, local consumer services, user acquisition and engagement, and user experience and infrastructure", costs of revenue are expected to increase both in

absolute monetary terms and also potentially as a percentage of total revenue.

We recall that Alibaba's original business model is an online commerce platform that facilitates third-party selling by external merchants, a not so operationally heavy business to maintain and carry out. However, as the Chinese e-commerce market gradually matured and saturated, Alibaba expanded its scope based on a more operationally heavy new retail strategy that involves incorporating offline retail, direct (i.e. first-party) sales, and logistical services. Examples include the acquisition of offline retailer Sun Art, the establishment of (first-party selling) premium supermarket Hema, the launch of community buying program Taobao Grocery, as well as related logistics and delivery services that are part of Cainiao and Fengniao Networks.

In addition to the Group's new retail initiatives, Alibaba also cites additional costs related to its international expansion (e.g. inventory costs and costs in relation to fulfillment and delivery services) and expansion of its cloud computing segment (e.g. infrastructure investments involving higher bandwidth fees and colocation costs) as contributing factors to the increasing costs of revenue.

Note: colocation refers to a practice where companies can rent equipment, space, and bandwidth for computing services from an external data centre provider.

#4: Alibaba's Net Income Exceeded Operating Income in Recent Years Due to Proportionally High Interest and Investment Income

During the past three years since 2019, Alibaba's net income has been higher than its operating income. This is due to relatively high levels of interest and investment income during the period (RMB44.1 billion, RMB73 billion, and RMB72.8 billion in 2019, 2020, and 2021 respectively), which are added to income from operations to arrive at net income. A thorough examination shows that there are no consistent, systematic factors contributing to the proportionally high interest and investment income across the years.

Note: for reference, in 2019, Alibaba recognized interest and investment income from revaluation gains of previously held equity interest in Koubei and Alibaba Pictures, while in 2020, Alibaba recognized a one-time gain in relation to the receipt of equity interest in Ant Group and the joint venture contribution of its AliExpress Russia business. In fiscal 2021, Alibaba recognized a revaluation gain of the Group's previously held equity interest in Sun Art upon consolidation of the latter business.

Revenue Breakdown by Operating Segment

In this and the subsequent section, we examine Alibaba's revenue drivers in more detail.

As explained previously in Part 1 of the series, Alibaba has four main operating segments:

  1. Core Commerce

  2. Cloud Computing

  3. Digital Media and Entertainment

  4. Innovation Initiatives and Others

The specific monetization channels for each operating segment are summarized below.

(We recommend reading the summaries in conjunction with each segment's business description in Parts 1 and 2 for a more comprehensive picture).

Core Commerce

Revenue in the core commerce segment consists of revenue from direct selling, commissions, membership fees, as well as customer management services (i.e. performance-based advertising fees), depending on the specific marketplace. We break down the segment's revenue sources further in the following section.

Cloud Computing

Revenue is generated from enterprise customers based on the duration and usage of Alibaba Cloud's services.

Digital Media and Entertainment

Revenue comprises of membership subscription fees, self-developed online games revenue (mostly sales of in-game virtual items), and customer management revenue (i.e. performance-based advertising fees).

Innovation Initiatives and Others

Revenue is primarily generated from service fees paid by enterprise customers (e.g. software service fees for Amap) and product sales to consumers (e.g. T-Mall Genie speakers). Alibaba also mentions annual fees payable by affiliate Ant Group in relation to the micro-lending business (see here) transferred from Alibaba to Ant in 2015 as another source of revenue, although the annual fee arrangement has ended in 2021.

Next, we take a look at a couple of stylized facts and graphs capturing the evolution of each of Alibaba's key operating segments. The most notable finding is that while Alibaba's revenue has steadily grown over the past five years, a breakdown of total revenue by operating segment shows that this growth was not particularly dominated by one segment or another. Rather, each operating segment continued to maintain a steady proportional contribution to the Group's total revenue.