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Morningstar | Alibaba's Long-Term Monetization Opportunities Fully Intact Despite Lingering Trade War Concerns

Our positive long-term bias on Alibaba remains intact following its third-quarter update, as the company continues to put up numbers that validate the resiliency of its business model during uneven economic conditions but also the monetization opportunities from the network effect behind our wide moat rating. China skeptics are painting this quarter's 41% top-line growth as a negative--Alibaba's slowest growth quarter since 2016--but we see the trajectory as a positive because Tmall GMV continues to outpace broader China GMV trends (29% versus 24% using iResearch estimates). More important, strong results from ancillary businesses like Ele.me/Koubei, and New Retail/Freshippo stores (formerly Hema) validates user engagement trends and signals future monetization opportunities (which we've factored into our five-year revenue CAGR of almost 35%).

We continue to believe share price appreciation will be difficult until trade war headlines subside but call out four reasons the market is underestimating Alibaba's future growth. One, Alibaba's direct exposure to tariffs is limited to only a low-single-digit percentage of revenue. Two, 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. Three, the Chinese consumer remains relatively healthy, backed by wage growth, solid personal balance sheets, and access to consumer credit. Four, we expect government VAT and personal income tax adjustments will create spending stimulus for middle-income consumers.

Our $240 fair value estimate remains unchanged. We 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.

Management reiterated its full-year revenue outlook calling for CNY 375 billion-CNY 383 billion (representing 50%-53% growth year over year), though we believe it's reasonable to assume results closer to the lower end of this range as consumers continue to show restraint with discretionary purchases. Still, we believe the aforementioned VAT and personal income tax adjustments and other regulatory measures will help to reaccelerate consumer spending, which is enough to leave our five-year GMV and China retail revenue growth targets of 30% and 32% in place. Alibaba continues to invest behind local services, Lazada, Tmall/direct imports, and Cainiao, but strong core marketplace profits should be sufficient to keep long-term adjusted EBITDA in the mid-30s (compared with our updated expectations in the low-30s for 2019).