Alibaba (BABA) released its September quarter earnings report on November 16. Here’s Morningstar’s take on Alibaba’s earnings and shares
We are surprised that Alibaba will no longer fully spin off Cloud Intelligence Group, and we see greater uncertainty around the size and timeline of capital returns to shareholders.
Alibaba has considered the importance of gross merchandise volume, or GMV, which leads us to believe that the company is not confident about its future GMV growth.
The executive said the recent US export ban to China – which we believe involves Nvidia’s NVDA-minimized H800 and A800 chips – led to the cloud unit spinoff being halted. However, we believe that Alibaba would have already included such prohibitions in its decision-making. We believe the move may have come because a CEO change for the cloud unit led to a review of future strategy.
A possible concern could be that the cloud unit requires consistent and significant investment to stay ahead of the game, and it may have a harder time finding funding as an independent company. We believe there will be more clarity on the corporate strategy for the cloud unit once its CEO is settled.
Making the business units responsible for their own profits and losses helps the company’s bottom line.
Alibaba was 4% above Refinitiv’s consensus estimate in adjusted EBITA and 7% below consensus in net profit.
Alibaba stock price
Source: Morningstar Direct, 20 November 2023
Key Morningstar metrics for Alibaba
• Estimated fair value: $128.00
• Morningstar rating: 4 stars
• Morningstar Economic Moat Rating: Broad
• Morningstar Uncertainty Rating: High
Estimation of fair value for Alibaba
With its 4-star rating, we believe Alibaba’s stock is undervalued compared to our long-term fair value estimate of $128.
Alibaba’s share of the Chinese retail GMV and consumer goods retail market fell for the first time in a year – down 100 basis points from our 2022 estimate to 17%. We expect it to go to 13% in a decade. According to our estimate, the ratio of GMV to online sales of physical goods will halve from 62% in the year ending March 2023 to 31% a decade later.
Given the fierce competition to acquire merchants and a potential shift toward recruiting more small and white-label merchants, we assume that the monetization of the Chinese retail market will decline from 3.8% in the year ending March 2023 to 2, 8% by the end of the next decade , versus our previous expectation that it would remain flat.
Learn more about Alibaba’s fair value estimate
Economic Moat Rating
Despite increasing competition, Alibaba earns a wide economic moat based on its strong network effect. The platform becomes more valuable to both customers and sellers as its total number of users increases.
Alibaba monetizes its network effect better than any other e-commerce platform in China. None of its new competitors – primarily third-party e-commerce platforms Pinduoduo and short video platforms Douyin and Kuaishou – have proven they can monetize the brick-and-mortar e-commerce market for goods with a sustained profit margin. Meanwhile, Alibaba has been profitable for a decade, and we believe it will remain profitable for the next 20 years.
Furthermore, we believe that the live streaming e-commerce offered by Kuaishou and Douyin is a complement and not a replacement for mainstream e-commerce platforms. E-commerce live streaming tends to satisfy impulse purchases instead of planned or urgent ones.
Even if these new competitors are successful in creating long-term sustainable profits, we still see Alibaba’s position as irreplaceable due to its share of consumers’ mind, large range of warehousing units, logistics infrastructure, operational expertise (management of products and merchants, protection of consumers), and tools for merchants to manage entire product life cycles.
Alibaba is the largest e-commerce platform that provides predictability in sales and production volume to its merchants, leading to predictable production costs. It has reported over 90% retention of its annual active core consumers aged 25-44 and contributed 70% of GMV for the year ending September 2021, despite competition. Annual active core users in Alibaba’s China retail markets had a retention rate of over 90% for the year ending September 2021.
Learn more about Alibaba’s moat rating
Risk and uncertainty
We assign Alibaba a High Morningstar Uncertainty Rating. China’s e-commerce landscape has become increasingly competitive, with Pinduoduo registering faster GMV and user growth than Alibaba and JD.com JD demonstrating its quality services amid the covid-19 pandemic. Short video platforms and Tencent have also entered the e-commerce sector. Pinduoduo’s number of active buyers surpassed Alibaba’s in the year ending December 2020.
The biggest material environmental, social and governance issue for Alibaba is its anti-competitive business ethics. It was fined CNY 18.2 billion in April 2021 for forcing merchants to exclusively choose its platform, and was required to curb its anti-competitive behavior. Financial regulators in China have continuously scrutinized online financial services, leading to the suspension of Ant Financial’s IPO.
Read more about Alibaba’s risk and uncertainty
BABA Bulls Say
• GMV 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.com;
• Annual active core users in Alibaba’s China retail markets had a retention rate of over 90% for the year ending September 2021;
• Alibaba’s China trade-adjusted EBITA margin was 32.5%, higher than JD.com’s 3.1% non-GAAP EBIT margin and Pinduoduo’s 12.4% non-GAAP EBIT margin for the 12 months ending December 2021.
BABA Bears says
• Expansion of other e-commerce players may slow down Alibaba’s growth. Pinduoduo’s active buyers began surpassing Alibaba’s in December 2020;
• Expansion into non-physical marketplaces and other regions led to lower margins, and the timing of profitability for these businesses is unknown;
• Any Internet company with enough traffic, such as Douyin and Tencent, can enter the e-commerce space due to its low entry barriers. Douyin has taken market share in apparel and beauty against Alibaba.
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