Alibaba’s Taobao Shift and Succession Plan Should Bring Long-Term Benefits

Alibaba Stock at a Glance

• Fair Value Estimate: $177
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Alibaba Stock Update

According to a June 19 LatePost report, Alibaba Group’s BABA management may allocate more resources to its online shopping platform Taobao, smaller merchants, and value-for-money products versus its business-to-consumer site Tmall, which houses larger merchants and brands. We believe such a strategy puts near-term earnings pressure on the firm, but should also boost its long-term competitiveness, supporting our wide moat rating.

We suspect this move could shift a larger share of traffic to Taobao. According to our estimate, advertising from brands may decline, which could hit some ad revenue in the near term. In the long run, we think there is room for small merchants to increase monetization, as we see PDD Holdings PDD raising its take rate to an estimated 3.80% in 2022 from 2.99% in 2019. In our view, PDD will face stronger domestic competition from Taobao than JD.com JD, as PDD and Taobao have strong experience working with smaller merchants.

A Flatter Org Chart Likely

According to the report, Alibaba’s organizational structure is likely to be flatter, which mimics JD.com’s move. We expect to see a faster reaction to changes in the market, which should be positive for Alibaba’s market share in the long term.

Furthermore, should there be any meaningful layoffs, we expect it to be positive for the margin in the near term. Time spent on the platform’s app and the number of daily active users will be more important performance indicators than monetization and gross merchandise volume, or GMV. Staff will therefore need time to adjust, which may put pressure on earnings in the near term, similar to what we expect at JD.com.

We also think it will take time for customer stickiness to develop and translate into monetization. This will hit GMV and monetization in the coming year, but we believe Alibaba will see a slower market share loss after that.

Pending additional details, we maintain our fair value estimate and earnings forecast for Alibaba.

Chairman and CEO Succession Plan Is Positive for Corporate Governance

Alibaba’s leadership plan sees the segregation of the chairman and CEO roles, alongside the appointment of Taobao and Tmall Group chairman Eddie Wu to succeed Daniel Zhang as CEO. We believe these moves should enhance the firm’s corporate governance. Zhang will remain CEO and chairman of Alibaba’s Cloud Intelligence Group and will be able to focus on its operations and plans. Overall, the leadership changes don’t have an impact on our fair value estimate for the company.

The planned spinoff of the Cloud Intelligence Group via distribution to shareholders as stock dividends is expected to be completed in the next 12 months. We think it is appropriate for Zhang to focus on the cloud business to reaccelerate its slowing revenue growth, capture the opportunities offered by generative artificial intelligence, and prepare for the group’s IPO. We also think this arrangement will lead to higher independence from Alibaba Group, increasing the probability of Cloud Intelligence winning business from competitors, since customers are more likely to believe it will not share their data with Alibaba.

At this stage, we are not certain whether Zhang will leave the Alibaba Partnership to further increase the Cloud Intelligence Group’s independence. We would also like to see the separation of the CEO and chairman roles at Cloud Intelligence to improve its corporate governance further.