By Ichiro Suzuki Since its frenzied September 2014 debut in the NYSE, Alibaba has been doing very well, tripling its shares in just six years. However, here is one problem for Alibaba. Amazon had its value grown a stunning ten fold during the same period. Though Alibaba was larger than Amazon In terms of equity market capitalization at the time of its IPO, it trailed Amazon by a whopping trillion dollars (almost) at the end of August. Two summers ago, there was still a moment when Alibaba was a touch larger than Amazon in the north of $500 billion. In the next two years, Alibaba rose 50% while Amazon tripled. There doesn’t seem to be anything wrong with Alibaba in terms of technology or management. If there was one thing that might be working against Alibaba, it could be its total addressable market (TAM), tech analysts’ favorite jargon. Alibaba is effectively shut out of the U.S. and, along with other Chinese tech firms, is seen with growing skepticism in other western democracies, including those in East Asia. Reciprocally, Amazon is banned in China but has a strong presence in the developed counties outside the U.S. In the developing world, Alibaba probably has an edge except in India that is recently busy kicking out Chinese apps following the Sino - Indian military clashes on their Himalayan border. These developing countries, especially African countries and Belt & Road Initiative clients, however, have much weaker purchasing power than developed democracies, despite their large population and potentially bright future that some people love to talk about. Their future might be bright but their income levels are still a fraction of developed economies’. For instance, South Africa is the ‘wealthiest’ country on the African continent with per capita GDP at $6,100 according to the IMF, which is less than 10% of the U.S. and the less than 15% of the EU. For other African countries, their income levels are considerably lower than South Africa. Their history of mismanaging the economy amid unstable politics implies what could be a bright future cannot be captured in the foreseeable future. In discount cash flow of future earnings from these regions, Alibaba’s share price and valuation do not fare that well. While having a great presence in a number of countries makes it look good, this is not the UN General Assembly where each country is given one vote regardless of a country’s economic might. In fact, this is how the People’s Republic conducts its foreign policy at the UN, gathering support from African countries who tend to vote as a bloc at the General Assembly. In the financial market, it doesn’t go this way. Apple sells far fewer number of handsets than some of its competitors but still controls approximately two-thirds of the smartphone industry’s profits. Apple’s App Store is a great deal more profitable than its competitors, Google Play or else, since Apple users tend to spend a larger amount than users of competitors. Ultimately, a share price is a multiple or earnings per share and price-earnings ratio. On top of it, a greater potential of EPS growth tend to boost P/E ratio. Affluence of the customers matters, defining the size of the market in monetary value. The same is true for Corporate China in general. Pursuing market share as new comers, Chinese companies usually enter a lower end of the market, selling less expensive goods with smaller margin than established competitors. This is a sound business strategy that was employed by Japanese and Korean competitors when they were new entrants in the global market. Huawei is an epitome of a Chinese companies entering developed countries’ markets with lower-priced telecom equipments than those of Cisco Systems, Ericsson, Samsung or NEC. By the end of the second decade of the 20th century, Huawei came to boast of leading edge in 5G technology. Being privately held, how Huawei would have performed in the stock market if it were a public company is totally a guess. While the company has been growing materially faster than its western competitors, low margins might have put a damper on its valuations. Now due to the intensifying Tech Cold War, Huawei is is not only being shut out of the western markets, but also is losing access to cutting edge technology in semiconductors, etc. Huawei is suffering an ordeal of a sudden shrinkage of TAM for them and something much worse. Their effect on share price would have been devastating, if it was traded in a stock exchange. It is truly unfortunate that TikTok has become a victim of the Sino-American Tech Cold War. It is the first Chinese company to break through to the American, and global consciousness, something its compatriots, including Alibaba, Baidu, and Tencent have not been able to do. TikTok might have enjoyed truly great TAM and equity market valuation that comes with it.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan