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Morningstar | Alibaba GMV/Revenue Trends Reflect Uneven China Macro Picture, but We Still See Long-Term Potential

Heading into Alibaba's fourth-quarter update, our attention was focused on recent concerns regarding negative trade war headlines and China's overall macro environment, and how these factors would impact its full-year fiscal 2020 outlook. We've long thought that Alibaba and the network effect that underpins our wide moat rating would insulate its business model from macro headwinds, and we see China's recent retail sales deceleration as more of a consumer confidence issue than structural changes in Chinese consumers' ability to spend. Our confidence is rooted in Alibaba's China marketplaces, which offer Chinese consumers access to branded products at competitive prices, and ancillary businesses like Ele.me/Koubei and New Retail/Freshippo stores (formerly Hema) that are increasingly becoming integrated into Chinese consumer behavior.

Consensus expectations called for fiscal 2020 revenue CNY 508.9 billion, an increase of 35% compared with the reported CNY 376.8 billion (which aligned with management's guidance for CNY 375 billion-CNY 383 billion). While management's initial guidance calling for "over CNY 500 billion in revenue" in fiscal 2020 is slightly below market expectations--and likely assumes China retail GMV growth in the high-teens for the full year--we still believe our $240 fair value estimate is valid for several reasons. One, economic downturns have historically offered e-commerce marketplaces opportunities to lock in new buyers/sellers, which then engage in other higher-margin products and services as conditions stabilize (which was apparent in the continued strength of Alibaba's local consumer business segment). Two, the Chinese consumer remains relatively healthy, backed by wage growth, solid personal balance sheets, and access to consumer credit. Three, Alibaba appears to be adjusting certain cost line items for current market conditions (most notably sales and marketing) that should help offset the revenue deceleration impact on free cash flow.

We continue to believe share price appreciation will be difficult until trade war headlines subside but continue to believe the market is underestimating Alibaba's future growth. However, while we plan to adjust our fiscal 2020 GMV and revenue growth assumptions (roughly 19% and 33%, respectively), we also expect to raise our near-term adjusted EBITDA margins assumptions to the mid-30s (up from the low- to mid-30s) based on cost containment efforts. These changes will effectively cancel one another out, leaving our $240 fair value estimate unchanged. Our model continues to assume that China GDP growth rates slow to the 4% range, but still being driven by household consumption rates as opposed to government or export activity. However, we believe the current market price assumes only nominal economic growth, making Alibaba one of the more underappreciated e-commerce plays for longer-term investors.