Alibaba Provided Positive Outlook; Investment Will Only Put Small Pressure on Margins

Although wide-moat Alibaba’s BABA December quarter revenue was roughly in line with Refinitiv consensus and our own estimates, adjusted EBITA was better than consensus and our estimates, and management provided a positive outlook. We maintain our fair value estimate at USD 177 per ADS and HKD 171 per share. The shares are trading at 17 times PE ratio for fiscal 2023 and only 10 times PE ratio for fiscal 2024. The share price is undemanding. We continue to think Alibaba will benefit from the reopening of China due to its exposure to discretionary goods and the rebound in higher-margin apparel category following Chinese New Year.

Revenue in the December quarter came in at CNY 248 billion, up 2% year on year, and slightly above Refinitiv consensus estimate of CNY 245 billion as of Feb. 23, but in line with our estimate of CNY 247 billion. Adjusted EBITA was CNY 52.0 billion, increasing by 16% year on year, beating the consensus estimate of CNY 46.7 billion and our estimate of CNY 47.0 billion, both by 11%. The largest improvements in absolute adjusted EBITA on a year-on-year basis came from international commerce and local consumer services. Free cash flow was up 15% year on year.

We expect Alibaba’s revenue to grow at 2.5% in fiscal year 2023, lower than the 3.1% previously estimated, and adjusted EBITA to rise at 8.5% for fiscal 2023, lower than 9.1% previously estimated, due to worse-than-expected gross merchandise volume performance in January and February. For fiscal 2024, we maintain our revenue growth of 11.9%. As a result of more investments and higher mix toward lower-margin first-party business, we assume adjusted EBITA margins in the year-over-year basis for fiscal year 2024 will be down by only 30 basis points to 15.9% and trimmed our adjusted EBITA growth to 10.1% from 13.5% previously estimated for fiscal-year 2024.