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Alibaba Shakes Off Macro Pressures

The Internet giant’s wide-moat businesses mostly shielded it from China’s economic woes, writes Morningstar’s R.J. Hottovy.

Mobile was a key driver behind the better-than-expected results, with mobile GMV and revenue accounting for 62% and 61%, respectively, of total quarterly growth for China GMV and revenue. Mobile take rates (2.39%) are bridging the gap with desktop (2.47%), suggesting that mobile will soon make more meaningful contributions to revenue and profitability. Tmall GMV growth accelerated slightly versus the first quarter (56% versus 55%), suggesting that the company is successfully navigating the industry shift from C2C to B2C while gaining traction with a wider group of business sellers. This lends support to the network effect underpinning our wide moat rating. Cloud revenue (up 128%) was stronger than anticipated; while management hinted at current unprofitability for this segment, we expect this to change as the current cloud investment cycle winds down and it adds new services/products.

After factoring in better-than-expected top-line results and solid expense leverage--adjusted EBITDA margins were down just 20 basis points to 50.3% despite mobile, cloud, omnichannel, and cross border investments--we're planning to raise our fair value estimate to $84 from $76. We're forecasting top-line growth in the mid-20s and adjusted EBITDA margins in the low 50s during the next five years. While shares appear only slightly undervalued, we'd keep this name on investors' radar screens for any undue weakness.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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