Alibaba Group BABA released its earnings report for the first quarter and full fiscal year of 2023 on May 18. Here’s Morningstar’s take on what to think of Alibaba’s earnings and stock.
Alibaba Stock at a Glance
- Fair Value Estimate: $177
- Morningstar Rating: 5 stars
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Wide
What We Thought of Alibaba’s Q1 Earnings
- While Alibaba Group’s adjusted earnings before interest, taxes, and amortization rose 60% year on year—15% higher than Refinitiv consensus—the company’s stock is down since the earnings report.
- We think the market reacted negatively because investments in users, a robust ecosystem, and technology in the China commerce business will likely cause declines in adjusted EBITA margin over the next three years. The pace and magnitude of unlocking value also missed expectations. The Alibaba International Digital Commerce Group, which contributes 10% to our sum-of-the-parts valuation, will raise external capital instead of going public in the foreseeable future.
- Alibaba will fully spin off its Cloud Intelligence Group via a stock dividend to shareholders, and the company plans to publicly list the group in the next 12 months. We think this will be a net positive for shareholders before the distribution of the stock dividend. But after it, some investors may keep the more promising cloud business shares while reducing their stakes in Alibaba Group, whose main business is the slowing Taobao/Tmall group.
- Before the stock dividend distribution, the Cloud Intelligence Group will raise private capital to bring in strategic investors who could help grow the business and will also issue an employee stock ownership plan to staff. This would lead to some dilution for Alibaba shareholders, although the firm’s capital management committee intends to keep it at a manageable level. Offsetting the dilution is the potentially higher revaluation of the cloud business, which will be owned by Alibaba shareholders. We note that Alibaba Group is still half of our sum-of-the-parts valuation.
- We see more plans to preserve synergies among the business groups amid the restructuring. The board of directors will approve business cooperation and data-sharing mechanisms within Alibaba Group. We estimate that the business groups are more likely than not to continue to provide services to one another.
- Overall, the pace and magnitude of unlocking value announced in the earnings release might have missed the market’s expectations, but we believe shares are undervalued for investors with horizons between three and five years, who can benefit as the company’s restructuring unlocks value. We think returns to Alibaba Group shareholders could take the form of dividends and eventually share buybacks.
Fair Value Estimate for Alibaba Stock
With its 5-star rating, we believe Alibaba’s stock is undervalued.
We assume a revenue compound annual growth rate of 7% for the next 10 years. We anticipate that an increasing e-commerce presence in underpenetrated categories, the growing Chinese middle class, and better technology for merchants on the firm’s platforms will contribute to its online retail revenue growth. Our 10-year revenue forecast is largely a function of average growth in gross merchandise volume of around 2% in the Chinese retail market. The marketplace’s monetization rates increase slowly, aided by new technology, but should stay below 3.9% in the next 10 years because of fierce competition.
We believe Alibaba will continue investing in technology infrastructure, logistics improvement, user experience, and strategic businesses with long-term value, but with more focus on profitability compared with before.
Economic Moat Rating
Despite increasing competition, we’re maintaining our wide economic moat rating based on Alibaba’s strong network effect (the platform’s value to consumers increases with a greater number of sellers, and vice versa). Alibaba is monetizing its network effect better than any other e-commerce platform in China. None of its new competitors—mainly e-commerce company Pinduoduo and video platforms Douyin and Kuaishou—have proved they can monetize the physical goods e-commerce market with a durable profit margin. Alibaba has been profitable for a decade, and we believe it will remain so for the next 20 years.
Even if these competitors can successfully generate durable long-term profits, we still believe Alibaba is unassailable in its position in the e-commerce market owing to its consumer mindshare, vast range of stock-keeping units, logistics infrastructure, operational expertise (governance of products and merchants, protection of consumers), and tools for merchants to manage full product lifecycles. It is the largest e-commerce platform that provides predictability for its merchants in sales and production volume, which leads to predictable production costs. Despite the competition, Alibaba has reported over 90% retention for its core annual active consumers who are 25-44 years old; they contributed 70% of gross merchandise volume for the year ended September 2021.
Risk and Uncertainty
We assign Alibaba a High Uncertainty Rating. China’s e-commerce landscape has become increasingly competitive, with Pinduoduo registering faster gross merchandise volume and user growth and JD Retail demonstrating quality services amid COVID-19. Short video platforms and Tencent TCTZF have also ventured into e-commerce. Pinduoduo’s number of active buyers surpassed Alibaba’s in the year ended December 2020.
Alibaba’s largest environmental, social, and governance issue is its ethics with regard to anticompetitive measures. In April 2021, the company was fined CNY 18.2 billion and required to change its behavior for forcing merchants to exclusively use its platform.
Expansion into peripheral businesses might distract management and reduce profitability without materially improving Alibaba’s ecosystem. While we’re optimistic about the firm’s ability to become a preferred partner for international retailers and consumer brands looking to sell in China, it does not enjoy the same network effect and brand recognition in other countries, and it may face challenges when directly expanding in these markets.
BABA Stock Bulls Say
- Gross merchandise volume per annual active user was CNY 8,833 for the year ended March 2022—higher than CNY 3,285 in 2021 for Pinduoduo and CNY 5,905 in 2021 for JD Retail.
- Alibaba’s China retail marketplaces had a retention rate of over 90% for core annual active users for the year ended September 2021.
- Alibaba’s adjusted EBITA margin for China commerce was 32.5%—higher than JD Retail’s 3.1% non-GAAP EBIT margin and PDD’s PDD 12.4% non-GAAP EBIT margin for the year ended December 2021.
BABA Stock Bears Say
- Expansion of other e-commerce players could slow Alibaba’s growth. Pinduoduo’s active buyers started to exceed Alibaba’s in December 2020.
- Expansion into nonphysical goods and other areas leads to lower margins, and the timing of profitability for these businesses is unknown.
- Any internet company with traffic like what Douyin and Tencent see can go into e-commerce because of the sector’s low barrier to entry. Douyin has gained market share in the apparel and beauty space against Alibaba.
This article was compiled by Muskaan Hemrajani.
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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.