EUR 850.00 For Business Accounts Only

Morningstar | Recent Trade Wars Concerns Overblown, Alibaba's Long-Term Growth Story Not Getting Enough Credit

Wide-moat Alibaba has had a summer to forget, with shares falling 22% to $164 per ADR after reaching an all-time high of $211 in mid-June. The timing of the selloff coincides with tariff announcements on Chinese goods by the United States and subsequent retaliatory tariffs on U.S. goods by China. However, we believe that negative trade war headlines have been masking many of the positive steps that the company has taken to increase engagement among its existing user base and incubate new potential avenues of growth. 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 share management's views that the impact of trade wars will be muted. Morningstar's 10-year economic outlook for China calls for a slowdown in China GDP growth rates to the 4% range, but still being driven heavily (90%-plus) by household consumption rates as opposed to government consumption or export activity. Coupled with relatively healthy Chinese household balance sheets and easier access to capital, we don't see any major impediments to consumer spending in the region other than trade war headline risk, adding conviction to our longer-term revenue growth assumptions.

We've also been impressed by Alibaba's efforts to improve its core commerce platform, including accelerating active buyers (particularly in lower-tier cities) and greater user engagement through local services offerings, new retail strategies (which aim to give traditional merchants access to personalized mobile marketing, logistics, and content opportunities for a differentiated shopping experience), Alipay, and the 88VIP loyalty program.

Our previous global e-commerce research suggests that the path to longer-term cash flow doesn't just come from product sales themselves--though Alibaba's third-party approach to marketplaces certainly offers strong margins--but also new subscription services (where the up-front content investments have been made and contribution from each incremental subscribers falls almost directly to the bottom line), subscription pricing tiers, and other bundled services. We believe these initiatives will be important to our longer-term GMV, revenue growth, and margin assumptions.

Our fair value estimate assumes a revenue CAGR of almost 37% for fiscal 2019-23, including almost 61% growth in fiscal 2019 (consistent with management's 2019 revenue growth target of 60%, or 50% excluding acquisitions). We anticipate that higher spending among online shoppers, a growing user and seller base, and adoption of personalized mobile marketing services will all contribute to Alibaba's online retail revenue growth. Our five-year revenue forecast is largely a function of average annual China retail GMV growth around 31% from fiscal 2019 to fiscal 2023; monetization rates moving from 3.7% in fiscal 2018 to almost 4.2% in the next five years (aided by GMV from the B2C marketplace, a steady increase in mobile monetization rates, and new fulfillment and inventory bundling services from Cainiao); and greater contribution from cloud computing (nearly 55% average annual revenue growth the next five years) and digital media and entertainment (high teens). Our GMV outlook assumes 8% annual growth of Alibaba's China retail active buyer base the next five years, implying 828 million active buyers by the end of fiscal 2023, and mid-20s annual average growth in average GMV per buyer over the same time frame.

We believe mounting digital commerce and cloud competition will force Alibaba to continue investing in technology infrastructure, logistics innovations, user acquisition, and personnel. As a result, we expect some margin contraction over the medium term, with consolidated adjusted EBITDA margins retreating to the high 20s the next few years (compared with 47% in fiscal 2017 and 42% in fiscal 2018), due to technology, logistics, product development, online/offline and local services, and marketing investments, as well as the impact of recently acquired businesses. However, we expect margin trends to inflect over the medium term as the current investment cycle winds down and Alibaba's more nascent businesses scale, bringing our fiscal 2028 adjusted EBITDA estimates back to the low to mid-30s.