These days I’ve spent most of my time navigating Internet looking for market data and estimates for an upcoming report that my team and me are working at Capital Latino. This report is focused in several China based public companies that could be perfect for a diversified investing portfolio for savvy investors.
One of the companies we decided to add to the report was Alibaba Group (NYSE: BABA), the Chinese e-commerce behemoth which is taking the world in fields like not just e-commerce, but logistics, digital entertainment, payments, artificial intelligence, wealth management, healthcare, cloud computing and more.
I have to say that Alibaba Group is a very complex organization to understand, mainly due to the large quantity of business units which are part of the company: TMall, Taobao, Youku Tudou, Ant Financial Group (which is the company behind Alipay), Alibaba Pictures, UCWeb, Fliggy, Alibaba Cloud (known as AliYun inside Mainland China), among others.
That’s why I decided to write a book about the company and its many business units, but that story is for another moment. (If you want to know more about the book, you can sign up for the mailing list below:
But, at this time, let’s focus in just one part of “The Alibaba Economy “: Alibaba Cloud.
The numbers behind Alibaba Cloud
In the last financial report of the company (Q2 2017), which ended in June, 2017; the numbers related to this business unit are mind-blowing:
- The numbers of paying customers of its cloud computing business grew to 1,011,000 from 874,000 in the previous quarter
- Operation loss from cloud computing was RMB 532 million (US$78 million) and adjusted EBITA loss was RMB 103 million (US$ 15 million)
- Cloud computing revenue grew 96% YoY to RMB 2,431 million (US$ 359 million)
- Alibaba Cloud is providing 19 types of Elastic Computing Services products that can applied to 173 application scenarios, such as artificial intelligence, healthcare, video streaming, finance, e-commerce and IoT
- They announced the plans to build two new data centers in Malaysia and Indonesia, adding its presence in over 14 countries and regions to serve customers worldwide
- According to IDC, Alibaba Cloud ranks as the 4th in the world in terms of revenue
But one particular area where Alibaba Cloud has little efforts is in the CDN space. Although they offer several CDNs related services, they are behind the big companies of the industry like Akamai, Amazon Cloudfront, EdgeCast, MaxCDN, Fastly and Cloudflare.
The other part of the CDN equation is Mobile CDN or like the experts like to calle it “Mobile App Acceleration Networks“. This is another massive market, where companies like Twin Prime (now part of Salesforce.com) and Neumob are the clear leaders of the space.
So, this makes me to wonder:
How Alibaba Cloud could play aggressively in this crowded and challenging market?
Cloudflare: The company which have shaken the CDN and Cyber Security markets for good
If I have to define my decision in one sentence, I would say: Cloudflare is the most innovating company in the CyberSecurity space right now, not just in the CDN market, but in the DDoS protection, DNS security and now Video streaming with the new product of the company called Cloudflare Stream.
If you take the time to read some of the posts written by the entire Cloudflare’s crew on its blog, you will find just an amazing amount of highly regarded security innovations, touching topics who comes from massive DDoS attacks and how they fought them, their innovations in the adoption of DNSSEC, SHA-2, ECDSA, TLS 1.3 and many others things that are critical today in a world where Cybercrime is just growing every day, with costs estimates to reach $2 Trillion USD by 2019, according to Juniper Research.
The Cloudflare’s secrets are its Simplicity and its Massive Global Scale
And it seems that the strategy is paying off, because Cloudflare protects today more than 6 million of websites and apps around the globe, and this numbers is growing exponentially year after year; they have created an amazing marketplace; where key partners can offer its services to Cloudflare’s clients.
The another key advantage that Cloudflare has its simplicity, in terms of how to add a website to the platform, and how to charge its customers.
To add a website to Cloudflare, a company just need 5 minutes for it, and they offer a Free Plan, which is perfect to get used to the platform and to see its capabilities.
After that, you can decide for more with a simple change in your internal dashboard with plans who come from $20 USD per month to $200 USD per month, depending of your needs and challenges.
Cloudflare’s network is one of the most global scale projects I’ve ever seen in my life. They have Points of Presence (PoP) almost anywhere, with 118 Datacenters until this date:
But, there is another key point to discuss here: Cloudflare is has a strong presence in Mainland China since 2015 through its partnership with Baidu (who is an investor in the company too).
Today, we’re proud to announce our partnership with Baidu as well as the launch of 17 data centers across mainland China — in Qingdao, Fuzhou, Hengyang, Dongguan, Shenyang, Luoyang, Hangzhou, Jiaxing, Tianjin, Guangzhou, Chengdu, Langfang, Xian, Nanning, Zhengzhou, Shijiazhuang, and Foshan. In the months ahead, we will continue to expand our footprint in the country, and expect that by the end of 2016 there will be more locations in mainland China than exist across all the rest of CloudFlare’s network today.
So, Cloudflare is one of those companies that could add a tremendous value inside Alibaba Cloud.
Neumob: The company which could add billions of revenue to Alibaba Cloud’s accounts
It’s time to talk about Neumob. In simple terms: Neumob helps to accelerate mobile apps, decreasing its total load time, and increase the number of sessions per user, which translate directly to more revenue.
Why Neumob could be a key asset for Alibaba Cloud? Because China is a Mobile-First country. The majority of Chinese Internet users do everything on its smartphones and other Mobile devices, and companies are aware of this; and they have created Mobile apps to respond to the demand.
Neumob has a global presence too, with more than 120 PoPs around 83 different cosmopolitan areas, and they have presence in Mainland China too, specifically in Beijing, Shanghai, Guangzhou and Qingdao.
Let’s talk about numbers now
To see more closely the opportunity here, let’s analyze just two examples how Neumob could accelerate revenue generation for Chinese Mobile companies. I will take one internal example and one external example: Alibaba’s Core Commerce segment and 58.com.
An increase of RMB 846,080,000 for two lines of code in the apps
In the last financial report from Alibaba Group, China commerce retail business generated a total of RMB 36,712 Million (US$ 5,415 Million), which represented the 73% of total revenue, an increase of 57% YoY.
The annual China commerce retail revenue per annual active consumer increased from RMB202 for the quarter ended June 30th, 2016 to RMB273 (US$ 40) for the quarter ended June 30th, 2017; and Mobile revenue per Mobile MAU grew from RMB140 for the quarter ended June 30th, 2016 to RMB 196 (US$ 29) for the quarter ended June 30th, 2017.
Alibaba’s China retail marketplaces had 466 Million annual active consumers, and Mobile MAUs grew to 529 Million in June 2017.
Making a rough calculation, from April 1st to June 30th, 2017, they generated an average of RMB 141,635.81 per second (36,712 Million / 259,200 seconds).
According to a study conducted by Dimension Data Research in 2015, concluded that users abandon an app when its total load time is more than 3 or 4 seconds, or they think the app is slow.
This could results that 80% of your loyal users can’t buy anything in your marketplace. The same study found too that
But, let’s assume that Alibaba’s Mobile team is a very efficient team and its apps loads in an average of 2.2 seconds.
What about if they could reduce that time by half just to 1.1 seconds? This means that more users can buy more things in its marketplaces. If they had 529 Million of Mobile MAUs, this means that they could have an average of 2,041 users per second. What if with the reduction of 1.1 seconds, they could increase that number to just 2,100 users per second?
This could generate a total of 544,320,000 of Mobile MAUs. If they generate an average of RMB 69, the total revenue could result in RMB 37,558,080,000, an increase of RMB 846,080,000 for two lines of code in the apps.
It’s time to analyze 58.com
58.com is the largest online and mobile marketplace for classifiers in China. It’s one of the Unicorn-status companies using Alibaba Cloud services, and it’s a public company trading at the NYSE under the symbol WUBA. 58.com is other of the companies we included in our report at Capital Latino too.
In the last financial report of the company, which the period ended in August, 20th, 2017, the total revenues generated in the first half of the year were RMB4,581.6 million (US$ 676.3 million), an increase of 32% YoY. Membership revenues were RMB 1,756.6 million, and the total number of average quarterly subscriptions-based paying membership accounts was 2,338,000 in the period.
Making my calculations again: they generated an Average Revenue Per Account (ARPA) of RMB 751,33 in the period, and an average of RMB 6,777 per second.
Now, assuming that Mobile team at 58.com is very efficient too, and its apps loads on average of 2.2 seconds.
They could work closely with the Neumob’s crew and could achieved a reduction of the total app load time to 1.2 seconds, resulting in the increase of ARPA of RMB 810,50, which could result in a total revenue of RMB 1,894,949,000: an increase of RMB 138,349,000.
With just two examples, you could see the value that Neumob could bring to these companies. That’s why I strongly believe that this team could create a steady and large amount of recurring revenue if they decide to be part of Alibaba Cloud.
The Alibaba M&A strategy is perfect for Cloudflare and Neumob
In Alibaba 2017 Investor Day, one of my favorite talks delivered in the event, was the talk given by Joe Tsai, the Executive Chairman at Alibaba Group. In his talk, Joe provided a very detailed perspective about how Alibaba approaches acquisitions, investments and capital allocation.
Actually, the name of this post came from that talk when Joe used an analogy to describe his work, where he said:
I’m going to use an analogy in sort of describing my work. Think of Daniel (Daniel Zhang, the CEO at Alibaba Group), our CEO and also our business units heads as the chefs in the kitchen. They are the Michelin start chefs that are making great dishes in the kitchen. But in order to make good dishes, they need ingredients, and they say me: Joe, I need this ingredient, I need you to go out and find the best ingredient in this category and bring it back. So, what I do, is to go out to the supermarket, I go out to the farmers market, I go out to the web market and scout the Earth to look out the most proper ingredient, so I can bring it back into the kitchen for our chefs to make. And guess what, doing the cooking process, chemistry effects happen.That’s brings me to the importance of integration. Every time we make a strategic acquisition, or even an investment, some degree of integration is key. We need to focus on synergies with Alibaba, between the invested company or the acquired company with Alibaba. And that’s not a very easy process: it requires a lot of planning, and that’s why, in the process of making an investment or an acquisition, we need to get the business owner to also on the project.
It doesn’t matter the found sponsoring the investment, I really like it, I can’t independently go out to the market and say I like this fish and the chef ordered. That’s not right, so some business owner with the business unit or the CEO must sponsor the transaction that we do.
If you want to understand how Alibaba makes investments and acquisitions, you should watch this talk from Joe.
But you should be wondering yourself: Why I’m mentioning this talk right? It’s very simple: Joe explained in great detail there the importance of synergies between Alibaba and its assets.
But of the key things I learned in the talk, is why Alibaba, before even thinking in an acquisition of a strategic asset, they think first in an investment, and how both team could work together.
From my perspective, that’s a very good way to test how a particular asset could provide value to the company, even before to be part of “The Alibaba Economy”. And if you have read the post so far, you have been realized that Cloudflare and Neumob could fit very well in this ecosystem.
The last thing I learned in the talk, is that it seems Alibaba is very selective in their acquisitions and investments, and they are mainly focused in the B2C space.
They have spent $21 Billion in the last two years in areas like Digital Media and Entertainment (Youku), Electronics category (Suning), logistics (Cainiao), New Retail (Intime, Lianhua and Sanjiang), local O2O services (Koubei and ele.me), Social Media (Weibo), and Southeast Asia and India (Lazada, Paytm and Paytm Mall):
But you have noted one thing: They haven’t made any acquisition in the B2B space, especially in the Cloud Computing area.
Unfortunately, I don’t know why, but if I have to guess; they haven’t found a good asset which could trigger a chemistry effect with Alibaba.
Well, I strongly believe that Cloudflare and Neumob could be those assets.
The conclusions here are very simple: Cloudflare and Neumob could bring a lot of value to the overall business strategy behind Alibaba Cloud.
It would be nice to see Daniel, Joe, Matthew, Jeff and Simon Hu (President of Alibaba Cloud) in one room the future of CDN, Web Performance, Mobile Performance and Cyber Security markets, and how Alibaba could provide the resources, and how Cloudflare and Neumob could bring their extensive expertise in these markets to help not just to Alibaba but any enterprise customers inside Alibaba Cloud.
So, Simon, Daniel and Joe:
It’s cooking time
Call to Action
If you are interested to be a savvier investor, and you are looking for strategic companies outside of U.S, my team and I are working in a special report just for you.
This report no just includes Alibaba and 58.com, but several of the best Chinese public companies you should add to a diversified investing portfolio right now thinking in long-term. Stay tuned to our website:
P.S: We are working in the Spanish version too.