EUR 850.00 For Business Accounts Only

Morningstar | Alibaba Leadership Changes Won't Change Our Positive Long-Term Outlook; Shares Remain Undervalued

Jack Ma's decision to step away from wide-moat Alibaba's executive chairman role in 2019 and the company's board of directors will not impact our positive long-term bias for two reasons. First, we believe recent results demonstrate that Alibaba has a deep management bench, including current CEO Daniel Zhang (who will transition into the chairman role in 2019 and played a central role in the development of the Singles Day shopping event, building the Tmall platform from a regional to global B2C platform, and deploying several of Alibaba's "New Retail" strategies) and executive vice chairman Joe Tsai. Second, we believe Ma's involvement with the Alibaba Partnership--a 36-member group of core company managers--will allow him to stay involved with certain strategic decisions.

We remain comfortable with our $240 fair value estimate and believe Alibaba is one of the more undervalued investment stories in the consumer category. We believe that negative trade war headlines have been masking steps to increase engagement among its existing user base and incubate new potential avenues of growth. Our fair value estimate assumes a revenue CAGR of almost 37% for fiscal 2019-23, including 61% growth in fiscal 2019 (consistent with management's 2019 revenue growth target of 60%, or 50% excluding acquisitions). We expect adjusted EBITDA margins to contract to the high-20s the next few years (versus 42% in fiscal 2018) due to technology, logistics, product development, and marketing investments as well as the impact of acquired businesses. However, we expect margins to inflect as investments wind down and nascent businesses scale, bringing our fiscal 2028 adjusted EBITDA margins back to the low- to mid-30s.

Despite our confidence in management's ability to execute following upcoming management changes, we will maintain our Poor equity stewardship rating due to questions about partnership voting rights, variable interest entity (VIE) structure, and convoluted ownership structure.

The Alibaba Partnership--which maintains exclusive right to nominate up to a simple majority of the members of its board of directors and can approve candidates without a vote in certain circumstances--essentially controls the board and limits the influence of outside shareholders despite holding a minority stake. Operating under a VIE structure, Alibaba's ADR holders essentially own shares of Alibaba's VIE domiciled in the Cayman Islands, which can limit overseas investor's legal rights (though we believe that Alibaba will consider a China depository receipt listing in 2018 or 2019). Lastly, Alibaba maintains a complex organizational structure--approximately 500 subsidiaries incorporated in China and 420 subsidiaries incorporated in other jurisdictions as of March 2018--that can often lead to questionable ownership practices (including the 2011 decision to transfer ownership of Alipay to Ant Financial without the approval of Yahoo and SoftBank, who were key shareholders at the time).