Alibaba operates three of the largest digital platforms in China: e-commerce, cloud and payments. We estimate Alibaba Group (BABA:NYSE 9988:HKG) to be valued at up to US$900 billion based on a Sum Of The Parts (SOTP) valuation of its various operating segments:

#### Alibaba Group SOTP Valuation (2021)
![alibaba sotp](//images.ctfassets.net/vwq10xzbe6iz/5JX9uAgNOkj85xN3eJWyA8/16003aacd7bc9972fb8da8e3a55152a6/alibaba_sotp.png)

This article analyses Alibaba’s two main operating segments that represent up to 88% of the group valuation (Taobao/ Tmall and Alibaba Cloud) and shows how you can formulate your own valuation and thesis. To learn the fundamentals of valuing any technology company refer to [this article with a case study of how to value YouTube](https://mannhowie.com/youtube-valuation). 

__Key Sections:__
1. [China E-Commerce Market Share](#industry)
2. [Taobao/ Tmall Valuation](#taobao)
3. [Alibaba Cloud Valuation](#cloud)

## <a name="industry"></a>1. China E-Commerce Market Share
China dominates global online spending. Over 57% of total global online spend happens in China with an estimated +1 billion online shoppers spending over US$2.8 trillion annually. Online spending in China alone is more than 70% more than the next 10 countries combined.

#### Global E-Commerce Spend by Country (2021 Forecast) & China E-Commerce Market Share by Company (2020 Actual)
![global ecommerce](//images.ctfassets.net/vwq10xzbe6iz/5RpP7NWgAWsBH0A4nt048d/f2e7b2c21f59148f2c90ad8d99d618e0/global_ecommerce.png)

China is likely to continue to dominate global online spending the next decade and beyond. Relative to the United States, China has 5x the online shopping population and is still only at 20% of US GDP and Income per capita. Across e-commerce there are two economies: China and the Rest of the World.

Within China, e-commerce is dominated by three players: Alibaba, JD.com and Pinduoduo. Alibaba’s annual Gross Merchandise Value (GMV) across its two platforms Taobao and Tmall in China alone is more than all annual online spend across the US, UK and Japan combined. 

#### China E-Commerce Major Players
![china ecommerce table](//images.ctfassets.net/vwq10xzbe6iz/2vOtxucZPBnNJvlZH9KklU/c8ed8fe3cda225faf94169a6df37080a/china_ecommerce_table.png)
Across the three major Chinese players Alibaba maintains its dominant position. However newcomer pinduoduo has grown considerable share in a very short period focusing on a new trend in e-commerce in China, lower basket value social commerce.

## <a name="taobao"></a>2. Taobao / Tmall Valuation
Alibaba’s largest and most profitable segment is its e-commerce marketplace platform in China known as Taobao and Tmall. We value this segment at RMB 4 trillion (US$ 624 billion) representing 80% of the entire valuation of Alibaba.

### What is Taobao and Tmall?
With over 811 million active annual customers, Taobao is effectively the internet platform for e-commerce in China. Nearly all merchants and businesses that sell to Chinese consumers have an online store on Taobao. 

There are two main platforms within the one Taobao mobile and web app: Taobao and Tmall with a total GMV split 50/50:

- __Taobao__ is a marketplace platform where any merchant, person or small business can set up an online store and sell to the Chinese population.

- __Tmall__ is a B2C platform reserved for brand companies where they can set up their own dedicated stores. Most international brands selling into China will transact through their Tmall stores vs their own online shops.

#### Taobao vs Tmall
![taobao vs tmall](//images.ctfassets.net/vwq10xzbe6iz/4QhVDL6MlaqeWzoag1v54z/9ee6f6d521faa305e273bfd0f4407907/taobao_vs_tmall.png)

Alibaba’s e-commerce business model is marketplace-based and facilitates transactions between buyers and sellers. Unlike Amazon and JD.com, Alibaba does not purchase and resell inventory nor does it own or operate its own fulfilment and distribution centres. It is the sellers responsibility for organising delivery to the buyer either direct or via Alibaba’s network of 3rd party logistics providers (via its global Cainiao logistics business).

### How does Taobao Tmall generate revenue?
Ads and commissions:

- __Ads (70% of e-commerce revenue)__: merchants buy keywords and display ads on Taobao and Tmall to attract traffic and purchases to their stores. Ad monetization represents 2-3% of GMV transacted through the platform. Alibaba’s high margin ad revenue model is similar to Google’s cash cow Search business.

- __Commissions (30% of e-commerce revenue)__: merchants pay commissions on transactions through the Tmall network as part of hosting their stores on the largest e-commerce platform in the world. Commission monetization represents ~1% of GMV.

### What is the growth thesis for Alibaba China E-Commerce?
The e-commerce market in China is now highly mature with over 50% of retail sales done online and Alibaba maintaining the dominant share. Having been the dominant e-commerce platform in China for the last decade we expect overall growth to slow. 

Having said that, we still expect Alibaba to remain the dominant e-commerce platform in China and expect Alibaba’s annual GMV to grow another 50% over the next decade and ad monetization to increase from ~3% to +3.5%.

We can represent these assumptions as key operating metrics to arrive at a forecast annual revenue by the end of 2030 of RMB 521bn (US$82 bn), up from ~RMB 300bn (US$47bn) ending 2020.

#### Alibaba China Retail Marketplace Revenue Model (RMB)
![alibaba retail revenue model](//images.ctfassets.net/vwq10xzbe6iz/7AgIVJxBlV9K6uenKzyOX9/af5ab81611f9c3a6cba49f4a7b23d585/alibaba_retail_revenue_model.png)

### China Retail Marketplace DCF Valuation
We arrive at our RMB 4 trillion ($USD 624 bn) valuation for Alibaba’s China e-commerce business applying the following key assumptions:
- __EBITA margins__: remain stable at 72% given the high margin operating model of its ad ad and commission businesses. We expect Alibaba’s other segments to operate at break-even largely to support its high margin e-commerce segment (e.g. Cainiao logistics) 
- __Tax rate__: long term effective tax rate of 20% (China based)
- __Stock Based Compensation__: while non-cash we treat this as an expense as it’s largely a substitute for compensating staff. We expect SBC to remain at 25% of total revenue going forward to attract key talent
- __Reinvestment (Net Capex)__: assume a capital-light sales to capital ratio of 1.5 (in line with Alibaba historical and compares to 1.9 for Alphabet) meaning for every one dollar of incremental annual revenue growth, Alibaba will reinvest 66% back into the business for future growth
- __Discount rate__: assume 8% discount rate, low by historical standards but higher now given subdued global interest rates
- __Long term growth rate__: 3.5% above global GDP long term GDP growth of 2-3% as China is still expected to grow faster than the rest of the world for the next decade

#### Alibaba China Retail Marketplace DCF Model (RMB millions)
![alibaba retail dcf](//images.ctfassets.net/vwq10xzbe6iz/3em6HkDrD1MyZwUDTEdslh/e15b1815727f85c2aadc60bb3221838d/alibaba_retail_dcf.png)

## <a name="cloud"></a>3. Alibaba Cloud Valuation
Alibaba’s second most valuable operating segment is its cloud computing business Alibaba Cloud. We conservatively value this segment at RMB 390 billion (~US$60 billion) on the basis it continues to dominate the Chinese market but will face stiff competition globally particularly given political concerns in western economies around hosting of data by Chinese domiciled companies.

### What is Alibaba Cloud?
Alibaba Cloud is the 4th largest cloud computing provider globally and the largest in the Asia Pacific with +40% share in China. It sells cloud-based compute and storage infrastructure services to businesses looking to host their applications and data primarily in China (although it operates globally).

#### Global Public Cloud Infrastructure Services Spend 2020

![global cloud spend](//images.ctfassets.net/vwq10xzbe6iz/77Vqh2ZPUOpbpsZ2EmAFer/5f135f4d953b45be2e4716c4d5588999/global_cloud_spend.png)

Alibaba Cloud is similar to Amazon Web Services offering similar competing offers often at even lower prices when hosted in China vs AWS. It has a clear advantage over the other hyperscale cloud providers within China given its significant existing presence in the Chinese market and wider local market support.

### Alibaba Cloud DCF Valuation
Our RMB 390 billion (US$ 60 billion) DCF valuation for Alibaba Cloud is based on the following key assumptions:
- __Revenue__: Achieve revenues similar to that of current AWS levels by 2030, largely driven by growth in the local Chinese and Asian market. Alibaba is following in the similar footsteps as AWS (~7 years behind) as both the local market leader and without competition from global hyperscale providers. However growth is expected to slow as we expect international growth to be more difficult
- __EBITA Margin__: Achieve similar EBITA margins of +30% as AWS as it reaches scale and continues to reinvest for growth
- __Tax and SBC__: Effective tax rate of 20% and lower stock based compensation expense as % of revenues vs Alibaba China Retail as lower proportion of costs represented by people
- __Reinvestment Rate__: Sales to capital ratio of 1.5 continuing to reinvest 66% of net revenue growth back into the business each year
- __Discount and growth rate__: 8% discount rate and 3.5% LT growth rate in line with Alibaba China Retail

#### Alibaba Cloud DCF Valuation (RMB millions)
![alibaba cloud dcf](//images.ctfassets.net/vwq10xzbe6iz/1yolWWSzSGMD3dC1BOLU7j/d8fa2dedd86c7bde6d2fa70393c5700c/alibaba_cloud_dcf.png)

Alibaba operates three of the largest digital platforms in China: e-commerce, cloud and payments. We estimate Alibaba (BABA:NYSE 9988:HKG) to be valued at up to US$900 billion based on a Sum Of The Parts (SOTP) valuation of its various operating segments.

How Much is Alibaba Worth? US$900 billion in 2021

Here are three learnings you can apply from the fields of psychology and neuroscience to increase user engagement and build habit forming products.
1. [Deliver unexpected rewards](#reward)
2. [Repeat easy to perform actions](#repeat)
3. [Trigger to target environment](#trigger)

![hero habit](//images.ctfassets.net/vwq10xzbe6iz/6iFtiJ8t1d4ZM3mYnPzwmh/6c687f8baa2bd41a217e0311ad13a86a/hero_habit.jpeg)

## <a name="reward"></a>1. Deliver unexpected rewards
The human brain learns behaviours which deliver rewards that exceed predictions. Incorporate unexpected rewards in your product:
- __Congratulation messages__: congratulatory pop-up messages after a user performs a correct initial key action (e.g. creating your first post 🎉) 
- __Social feedback__: invite other users to send shout outs or add reactions to a user after completing an action (e.g. notify emoji reactions 🐐) 
- __Bonuses__: bonus credits, coupons and points (e.g. inviting users, sharing photos) 

Negative rewards that disappoint predictions can also cause people to unlearn behaviours. Ensure your product’s features do what users expect them to do. Identify and respond to bugs as early as possible for first time users. Retain users by continuing to find opportunities to deliver rewards that exceed predictions (under-promise and over-deliver). 

### Why?
Studies have shown that dopamine neurons in the brain are activated by rewards that exceed predictions rather than the actual reward itself ([reward prediction error coding](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4826767/#:~:text=Reward%20prediction%20errors%20consist%20of,rewards%E2%80%94an%20evolutionary%20beneficial%20trait.&text=The%20dopamine%20signal%20increases%20nonlinearly,and%20codes%20formal%20economic%20utility.)). The presence of dopamine helps neurons wire together and develop new behaviours including habits.

Dopamine neurons are a major contributor to addictions like gambling, and drug abuse. The variable nature of rewards causes people to develop habitual behaviours even in the absence of achieving the desired goal. Recovering heroin addicts often talk about chasing their first unexpected high and continuing to use even if they can’t get high.

#### Dopamine Reward Prediction Coding - Wolfram Schultz (2016)
![dopamine](//images.ctfassets.net/vwq10xzbe6iz/20nlsCNoAI1iESPNNQLB4P/64c73830b0f89950b5e41a6797cc3e64/dopamine.png)
> Demonstration of reward prediction error in brains of monkeys. Top panel shows increased dopamine response to an unpredicted reward (R). Middle panel shows lack of dopamine response to predicted reward (R) and bottom panel shows depressed dopamine response when a predicted reward does not occur. (From [Hard to Break](https://www.amazon.com.au/Hard-Break-Brains-Habits-Stick/dp/0691194327) adapted from [Schultz et al](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4826767/#:~:text=Reward%20prediction%20errors%20consist%20of,rewards%E2%80%94an%20evolutionary%20beneficial%20trait.&text=The%20dopamine%20signal%20increases%20nonlinearly,and%20codes%20formal%20economic%20utility.))

## <a name="repeat"></a>2. Repeat easy to perform actions
Incorporate features that are simple to perform, require limited decision-making and can be repeated (in a pleasant manner):
- __Single actions__: reduce complex multi-step tasks into single actions (e.g. Amazon 1-click ordering)
- __Feedback__: gather user input with predefined responses (e.g. slack comment reactions)
- __Less options__: favour less choices, create habit and reduce decision making (e.g. an Approve button vs transition status)

### Why?
Performing an action or task for the first time requires focus and planning. Repetition of actions in a consistent context progressively increases the formation of them into habits. 

A [study of healthy habit formation](https://centrespringmd.com/docs/How%20Habits%20are%20Formed.pdf) also found that the complexity of tasks impacts the development of habits. Participants who selected more complex tasks to develop as habits, such as exercise after meal, took 1.5 times longer than simpler tasks such as drinking after meal.

#### How are habits formed: Modelling habit formation in the real world - P Lally, C Van Jaarsveld, H Potts, J Wardle (2010)
![repetition](//images.ctfassets.net/vwq10xzbe6iz/1h121jkDKnIR21Rv7KaeNX/c51ddb6b56bc5250e2fe7a92c021c72e/repetition.png)
> Example of increases in automaticity scores based on daily questionnaires (42 max score answering “I did the task automatically”) over time. Most participants reached an asymptotic score representing habitual performance following repetition. More complex tasks took longer to achieve automaticity than simpler tasks.

## <a name="trigger"></a>3. Trigger to target environment
Habits are more easily learned based on the context at the time. Deploy triggers that take advantage of consistent context and cues your users find themselves in:
- __Time and Place__: when and where are users best placed to use your product? You are competing for their attention so target an ideal context (e.g. send early morning reminders to get them before they go to work)
- __Platform__: should they be performing the task on mobile, desktop, tablet via email? Focus triggers based on the relevant platform (e.g. use mobile notifications to get users to upload photos and email notifications to view and share reports).

### Why?
The brain’s two memory systems include both the conscious and the habitual (lizard brain). Habitual memories are contextual. A famous example comes from [Claparede’s Pinprick Experiment](https://www.researchgate.net/publication/226796062_Implicit_learning_and_implicit_memory_in_moderate_to_severe_memory_disorders) on an amnesiac patient. One day, he hid a pin in the hand he used to greet one of his amnesiac patients. Later, the patient had no memory of the pinprick or even greeting the doctor. When asked why she pulled her hand back she said “Sometimes pins are hidden in people’s hands”. 

In a study observing the [treatment context of spider phobia](https://www.sciencedirect.com/science/article/abs/pii/S0005789402800351), patients who were successfully able to fight their phobia had their fear return when confronted with the phobic stimulus in a context different than the one used during the initial therapy. The study suggests that new behaviours become easier to learn in a similar context and easy to lose when confronted with a different context.


How to build habit forming products: 1) Deliver unexpected rewards; 2) Trigger based on environment; 3) Repeat easy to perform actions

How to Increase User Engagement - 3 Learnings from Psychology

By recognizing the 5 key principles of User Experience (UX) design as popularised by [Don Norman](https://www.amazon.com.au/Design-Everyday-Things-Revised-Expanded/dp/0465050654/ref=asc_df_0465050654/?tag=googleshopdsk-22&linkCode=df0&hvadid=341744103972&hvpos=&hvnetw=g&hvrand=1891756520801654644&hvpone=&hvptwo=&hvqmt=&hvdev=c&hvdvcmdl=&hvlocint=&hvlocphy=9071871&hvtargid=pla-416263148589&psc=1), you will be able to see thoughtful vs bad design:

1. [Affordances](#affordances)
2. [Signifiers](#signifiers)
3. [Mapping](#mapping)
4. [Feedback](#feedback)
5. [Conceptual Model](#model)

First let me tell you about my pedestal fan. Then, we will apply these principles to look at [how YouTube designs their hugely popular mobile app](#youtube).

![fan](//images.ctfassets.net/vwq10xzbe6iz/5fcOhrcQydI8c2c3K6glFu/e3ab1076ddff5c6307bbd77ca15593fe/fan.png)

## <a name="affordances"></a>1. Affordances
My fan has the basic affordances of:
- Blowing air by rotating its blades;
- Adjusting height;
- Changing speed; and
- Auto swivelling

Affordances represent how a person can interact with an object. The relevant person here matters. The controls and blades are at the top of the fan meaning a child can’t reach. The affordance only exists for people above a certain height.

## <a name="signifiers"></a>2. Signifiers
My fan has three signifiers that influence its features:
- A screw handle for adjusting height
- A knob for changing speed
- A plug for enabling auto-swivel 

Signifiers are signs, hints and directions of what actions and affordances are possible. 

Let’s look at each of them:

### Screw handle for adjusting height
![height](//images.ctfassets.net/vwq10xzbe6iz/5o2lRwsRu3F15SFSiP5KWL/3f6b486b8cf1271895040871d8056dba/height.png)
The height control takes advantage of the perceived affordance that screw handles are for turning with the convention of clockwise, anticlockwise for the loosening and tightening to lock in the height. So far so good.

### Knob for changing speed
![control](//images.ctfassets.net/vwq10xzbe6iz/72gjyhJbHQzLvJee48CL3j/5d486c47ec02b2c23516eb09ef1f5119/control.png)
The speed control knob also takes advantage of the perceived affordance that knobs are for turning. The convention of numbers and turning from left to right indicates the level of power. The arrow signifies the current speed. The deliberate choice of the number zero limits the need to require an additional control to power on/ off the motor. Still good.

### Plug for enabling auto-swivel
The auto swivel is where the design gets confusing. The ON/ OFF signifier risks confusing the operation of the swivel with the power of the fan itself. Whilst a plug has a perceived affordance of pushing and pulling, convention is not clear as to which is ON/ OFF (ask around). I am always confused with my swivel.

An alternative design could be to use the similar knob control for speed with a text signifier of FIXED/ AUTO.
![control-alternative](//images.ctfassets.net/vwq10xzbe6iz/2X89cYodShgkzp78lIBusr/d56e21a1da124fc95bd77ec3af0aa53b/control-alternative.png)

### Accidental Affordances & Signifiers 
![fan-sock](//images.ctfassets.net/vwq10xzbe6iz/4WlnxmHmx6WOZkyh6aoh1d/a3e8a5f6f7ea76e2fa83067abb74980b/fan-sock.png)
Affordances and signifiers can also be accidental. Take the image above of a sock placed on top of the fan. It signals the affordance of the fan also being able to be used as a clothes drying stand. Be aware of these signs in products and explore designs to prevent or promote unintended use cases.

## <a name="mapping"></a>3. Mapping
Mapping is the spatial relationship between two separate things.

Controls should be close to the items being controlled. Our fan passes this design test. The speed, power and swivel controls are on the fan motor and the screw handle is at the center of the stand.

The natural mapping of left to right for speed control is also good.

## <a name="feedback"></a>4. Feedback
Immediate or timely feedback is important to communicate to the person what has just happened and what they should do.

The sound of the fan getting louder is a cue that turning the knob to the right increases fan speed.

The movement of the motor when the plug is pushed or pulled is a cue whether it is in FIXED or AUTO. However, this is difficult to perceive as there is a delay which prompts me to push up and down, shaking the unit and further confusing whether it is auto swivelling. Yes I hate this plug.

## <a name="model"></a>5. Conceptual Model
Conceptual models are how we understand an object to work based on our past experiences or what has been communicated to us.

Most people are familiar with fans and do not require an operating manual. Our fan has good signifiers and perceived affordances to help us understand and navigate its controls.

However, take a Dyson fan. It relies on a remote which if lost requires the person to press and hold a button at the base of the unit to turn the speed up to maximum and then down to mininmum. This is a deviation to the prior conceptual model and has caused much consternation amongst Dyson owners.
![dyson](//images.ctfassets.net/vwq10xzbe6iz/2a5KbLyNJwIhPxPGJpD7cd/e01edaa5c13c6a876a7df28054d28d77/Screen_Shot_2021-01-18_at_10.39.14_pm.png)

## <a name="youtube"></a>YouTube User Friendly Product Design
Let us look at the mobile design for the globally popular YouTube app. We will apply the 5 key principles of design to recognize deliberate design decisions.

![youtube-mobile-app-design](//images.ctfassets.net/vwq10xzbe6iz/cKzZ4mfE3ylijqZ2qiOfc/362b09e6382f5f17f19e91106d4c2c17/youtube-mobile-app-design.png)

Affordance | Signifiers
--- | ---
Play/ Pause | Toggle play and pause icon
Next/ Prev Video | Backwards and Forward arrow icon. Natural mapping
Comments | Comment count and expand icon inviting viewing. Placeholder inviting users to post. Sometimes it previews the most popular comment (YouTube spends a lot of time growth hacking comments to drive user engagement)
Like/ Dislike | Thumbs up and down icons. Convention pioneered by Facebook (don’t reinvent the wheel)
Share Video | Icon with explicit text. There is no standard convention between Android, iOS and Microsoft users as a share icon. For important features, when in doubt, be explicit.

In addition to the affordances above, the mobile app has hidden affordances of being able to fast forward/ backwards 10 seconds by double tapping in the natural mapping direction. Also if you click and hold a video it will open its features for you to stop following or not be interested in a video. These are useful features that are found through discoverability of active users. 

![youtube-discoverability](//images.ctfassets.net/vwq10xzbe6iz/16MJiKyqnkZp1ivTZIrCOT/cea7321b8afa209bf26d61adbb7d8a06/youtube-discoverability.png)

This is likely a YouTube design decision to hide visible signifiers that allow users to reduce their watch time and skip channels. By understanding user friendly design, you are also able to design unfriendly experiences to increase friction for features you may wish to dissuade people to use.

#### References:
[The Design of Everyday Things by Don Norman](https://www.amazon.com.au/Design-Everyday-Things-Revised-Expanded/dp/0465050654/ref=asc_df_0465050654/?tag=googleshopdsk-22&linkCode=df0&hvadid=341744103972&hvpos=&hvnetw=g&hvrand=1891756520801654644&hvpone=&hvptwo=&hvqmt=&hvdev=c&hvdvcmdl=&hvlocint=&hvlocphy=9071871&hvtargid=pla-416263148589&psc=1) - *Learn more about the above 5 key principles of design and the two additional principles of Discoverability and Constraints.*


Learn the 5 Ways to Make Your Products User Friendly: 1) Affordances, 2) Signifiers, 3) Mapping, 4) Feedback, 5) Conceptual Model. Recognize deliberate design from the hugely popular YouTube mobile app.

Howie Mann
Startup & Investing Advice
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How Much is Alibaba Worth? US$900 billion in 2021

How to Increase User Engagement - 3 Learnings from Psychology

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About me

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How Much is Alibaba Worth? US$900 billion in 2021

How to Increase User Engagement - 3 Learnings from Psychology

5 Key UX Design Principles - How to Make Products User Friendly

Howie Mann
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