After Earnings, Is Alibaba Stock a Buy, a Sell, or Fairly Valued?

Alibaba BABA released its fiscal third-quarter earnings report on Feb. 7. Here’s Morningstar’s take on Alibaba’s earnings and the outlook for its stock.

Key Morningstar Metrics for Alibaba

• Fair Value Estimate: $94.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Very High

What We Thought of Alibaba’s Earnings

• The main thesis with Alibaba has been increasing shareholder capital return, and the key concern has been the company losing market share to its peers. After earnings, neither of these elements has changed.
• At this stage, we like Alibaba upsizing its share repurchase program until the end of March 2027 to $35.3 billion, amounting to 18% of its market cap as of Feb. 7. The company is committed to reducing its outstanding shares by at least 3% annually for the next three fiscal years.
• However, as cash and investments under current assets accounted for 44% of Alibaba’s market cap, we hope to see share repurchase at a faster pace and greater magnitude. While we agree with the firm’s emphasis on driving market share growth in domestic and international e-commerce, as well as in the cloud, we think this will come at the expense of margin erosion.
• Alibaba is committed to selling noncore assets and increasing its return on invested capital to double digits over the next few years. This is a longer timeframe than we hoped to see, as selling assets amid weak market conditions is difficult.
• We’ve cut our fair value estimate of Alibaba by 27% to $94 per share. We reduced our 10-year revenue compound annual growth rate to 4% from 6% and adjusted EBITA growth to 3% from 4% to reflect intense industry competition, slower-than-expected retail sales recovery, and deflationary risks in China. We see lackluster topline recovery in the firm’s China marketplace, local services, and offline retail businesses in the coming quarters, due to a higher base resulting from the reopening of the China economy at the end of 2022.
• We have increased our Uncertainty Rating of Alibaba to Very High from High to account for the uncertainty in its strategy to regain market share in China’s retail marketplace and the risk of resultant margin erosion. We also downgraded Alibaba’s capital allocation rating to Standard from Exemplary, as its track record in recent years has been poor. The prime example is its market share loss in China’s retail marketplace.

Fair Value Estimate for Alibaba

With its 4-star rating, we believe Alibaba’s stock is undervalued compared with our long-term fair value estimate of $94. The company’s ratio of gross merchandise volume to sales for consumer goods in the China retail marketplace reduced for the first time in a year, down 100 basis points from our estimate in the year ended March 2023 to 17%. We expect it to go to 8% in a decade. We estimate the ratio of gross merchandise volume to online sales of physical goods will halve from 62% in the year ended March 2023 to 26% a decade later.

Considering the intense competition to acquire merchants and a potential shift toward recruiting smaller and white-label merchants, we assume monetization of the China retail marketplace to decline from 3.8% in the year ended March 2023 to 2.9% at the end of the coming decade, compared with our previous expectation of the figure staying flattish. We estimate a 10-year compound annual growth rate for total revenue of 4% versus 6% previously. Our estimate for Alibaba’s adjusted EBITA CAGR at the end of the decade has been cut from 4% to 3%, due to management reiterating its dedication to defending its market share by investing in users, ecosystem, and technology.

Read more about Alibaba’s fair value estimate.

Economic Moat Rating

Despite increasing competition, we still believe Alibaba has a wide economic moat based on its strong network effect, whereby the value of its platform to consumers increases with a greater number of sellers, and vice-versa. The company is monetizing its network effect better than any other e-commerce platform in China. The short video platforms Douyin and Kuaishou have not proved they can monetize the physical goods e-commerce market with durable profit margins. Meanwhile, Alibaba has been profitable for a decade, and we believe it will remain so for the next 20 years.

Additionally, we think Kuaishou and Douyin’s livestreaming e-commerce is a supplement and not a replacement for the offerings of mainstream e-commerce platforms. Livestreaming e-commerce tends to satisfy impulsive purchases instead of planned or urgent ones. Livestreaming’s return and refund ratio is high, which we think is inherent to its nature, as it’s built on impulse purchases. This makes it difficult for brands to solely rely on such a channel in the long term. Even if these new competitors successfully generate long-term durable profits, we think Alibaba will remain a key e-commerce marketplace due to its vast range of stock-keeping units, logistics infrastructure, operational expertise, and tools for merchants to manage full product lifecycles.

Read more about Alibaba’s moat rating.

Risk and Uncertainty

We assign Alibaba a Very High Uncertainty Rating. China’s e-commerce landscape has become increasingly competitive. Pinduoduo has registered faster GMV and user growth than Alibaba or JD.com JD, demonstrating its quality services amid COVID-19. Short video platforms and Tencent have also entered the e-commerce sector. Pinduoduo had more active buyers than Alibaba in the year ended December 2020.

The largest material environmental, social, and governance issue for Alibaba is its business ethics regarding anti-competitive measures. It was fined CNY 18.2 billion and required to curb anticompetitive behavior in April 2021 for forcing merchants to exclusively choose its platform. Financial regulators in China have continuously scrutinized online financial services, leading to the cancelation of investee Ant Financial’s IPO.

Read more about Alibaba’s risk and uncertainty.

BABA Bulls Say

• Alibaba should maintain or increase its gross merchandise volume share in China’s e-commerce space, demonstrating its ability to execute its turnaround strategy.
• Alibaba should be able to increase key metrics such as customer retention, purchase frequency, and average order value, driving gross merchandise volume growth to outperform the growth of China’s online retail sales of physical goods.
• Alibaba will deliver better-than-expected adjusted EBITA margins despite competition and reinvestment.

BABA Bears Say

• Alibaba’s gross merchandise volume share in China may decrease faster than we expect as competitors like Douyin successfully enter the search-based e-commerce business.
• Expansion into the nonphysical goods marketplace businesses and other regions could lead to lower-than-expected margins, delaying profitability.
• Alibaba could fail in its globalization, public cloud, and AI efforts, and deliver slower-than-expected earnings growth.

This article was compiled by Tom Lauricella.