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Trade Worries Shouldn't Derail Alibaba

Trade Worries Shouldn't Derail Alibaba

Wide-moat Alibaba has had a summer to forget, with shares falling 22% to $164 per ADR after reaching an all-time high of $211 in mid-June.

The timing of the sell-off coincides with tariff announcements on Chinese goods by the United States and subsequent retaliatory tariffs on U.S. goods by China. However, we believe that negative trade war headlines have been masking many of the positive steps that the company has taken to increase engagement among its existing user base and incubate new potential avenues of revenue. We remain comfortable with our $240 fair value estimate, and believe Alibaba is one of the more undervalued investment stories in the consumer category.

We share management's views that the impact of trade wars will be muted. Morningstar's 10-year economic outlook for China calls for a slowdown in China GDP growth rates to the 4% range, but still being driven heavily by household consumption rates as opposed to government consumption or export activity. Coupled with relatively healthy Chinese household balance sheets and easier access to capital, we don't see any major impediments to consumer spending in the region other than trade war headline risk, adding conviction to our longer-term revenue growth assumptions.

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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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