Alibaba - My Playbook For Success And Failure

Discussing How I Use Destination Analysis To Create My Alibaba Playbook

Disclaimer: This article is for informational & educational purposes only. Nothing I mention below is financial advice. Do your own research & speak to a financial advisor before making any investment decisions. Stock prices and market value have probably changed since this article was written. This is analysis is NOT a buy or sell recommendation.

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Alibaba has the chance to reward shareholders or continue sucking up capital.

Today, I want to go over my playbook for Alibaba. I like thinking about having two playbooks. Using a sports analogy, I’d have my playbook for Alibaba succeeding, and I’d have my playbook for Alibaba failing. Inside both of these playbooks are the fundamental shifts I will be monitoring in order to see what direction they’re going in. If I can see the business is following the success playbook, then shareholders should be rewarded over the long term. If they err and “follow” the failure playbook, that would be a signal for me to re-evaluate whether or not the business is something I want to be invested in or not.

If you want to see where I got the idea for this strategy, check out this thread I wrote:

The Thinking Investor @IrrationalMrkts

Nick Sleep turned $1 dollar of investor's money into $10.21 in only 14 years. In 2021 he released his partnership letters, which contain a masterclass on destination analysis, one of his key thinking tools. These 5 tips will change the way you think about investing:

My playbook strategy is built to accomplish these important tasks:

1. Understand what are the most important KPIs to follow

2. Be able to have benchmarks for specific KPIs I can follow to make sure the business is continuing to improve

3. The ability to predictably understand where a business should be in its life cycle in order to meet the goals that are part of my investment thesis

Once I understand the above, I’ll have a greater understanding of if the business is continuing to execute its strategies. If a business is executing, then great, I can just enjoy myself as a shareholder. If the business is failing to execute I can then dig a little deeper to find out if there are fundamental issues with my thesis. If this is the case, the business may no longer deserve a place in my portfolio!

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In case you don’t know what Alibaba is, here it is in 2 bullet points:

• Alibaba facilitates transactions between consumers and sellers utilizing e-commerce, retail, and technology

• It does this through a wide range of products that allow for payments, logistics, marketing, search, cloud services, and much more

Don’t worry, if you don’t understand Alibaba well, I’ll explain it better when I discuss each segment in more detail.

Let’s get to the playbook.

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In order to understand how Alibaba can succeed in the future, we’ll need to know what its key operations are. It’s not that hard to find out as they have it all listed out for us:

• Digital Media & Entertainment

• Innovation Initiatives & Other

• Local Consumer Services

• International Commerce

• China Commerce

• ANT Financial

• Unallocated

• Cainiao

• Cloud

While all these segments have some degree of importance, I’ll focus on the largest ones (in bold) with the most earnings power.

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China Commerce

The China Commerce segment is currently the most important part of their business.

The reason is that this is their only profitable segment.

It has revenues of RMB 169.986B and income from operations of RMB 53.127B. Currently, the China Commerce segment is the only profitable business segment Alibaba has, but there is an upside in the future. There are other segments that can eventually grow revenues and earnings, but when that will occur is getting a little tougher to understand.

The China Commerce segment is made up of

• Tmall Supermarket

• Alibaba Health

• Taobao Deals

• Tmall Global

• Freshippo

• 1688.com

• Taocaicai

• Sun Art

• Taobao

• Tmall

The simple way to measure the performance of this segment is by Gross Merchandise Volume (GMV). When GMV goes up, revenue and profit increase. When it goes down, revenue and profit decrease. In order for Alibaba to succeed we want to see GMV continue going up.