Alibaba: a whole ambition ignored by the stock market
events presented by Ali Baba (“Wide Moat”) assured us on the investor day, with a retention rate of more than 90% for primary consumers, which accounted for about 70% of gross transactions (GMV), especially for the retail market business in China.
However, we believe that market concerns have been ignored and this has led to a tepid market reaction.
Investors are concerned about future capital expenditures, the duration of these investments, their long-term profitability, future growth and lack of visibility into the trend of Alibaba’s margins in China.
Alibaba continues to invest in its business, and management points to near-term revenue growth and margin deterioration.
We believe the slowdown in near-term revenue growth is primarily due to traders hoarding cash to battle competition.
With a higher share of lower margin businesses, we expect some margin compression over the medium term, with a consolidated non-GAAP adjusted EBITA margin of 13.7% in FY2026 (vs. 8% in FY21 ).
Nevertheless, we particularly appreciate the understanding of Alibaba executives who want to use their comparative advantages to grow the company in less developed areas and penetrate these markets.
Alibaba reminded us to manage a comprehensive merchant-supporting infrastructure, which we believe is an overlooked asset.
We maintain Alibaba’s fair value at HK$182 (US$188) and our earnings forecast remains unchanged.
Alibaba’s competitive advantage is its ability to detect new consumer trends and its comprehensive trading services system.
With its large and diverse merchant and user base, Alibaba is well positioned to learn about retail and identify these trends.
This is important to drive growth in categories that are mature in online presence, such as apparel and beauty products.
Its comprehensive merchant services infrastructure includes its Business Advisor, Strategy Center, CRM and Brand Database platforms and tools that can help manage value throughout the consumer and product lifecycle.
Among the operational changes in Chinese markets, the Alimama WanXiangTai advertising platform seems to us to be the most effective. This tool is an AI-based optimization algorithm that can intelligently allocate advertising budgets between search, feeds, marketing programs and even third-party traffic to meet the needs of merchants.
In A/B testing, transaction volume per dollar of ad spend increased by 30%.
We believe there is potential for ROI as more traders adopt this new tool.
According to CEIC data, the value of retail sales in low-tier cities and towns will reach 15 trillion renminbi (CNY) in 2020, providing significant opportunities for Alibaba.
In the fiscal year to the end of March 2021, Alibaba’s comprehensive physical goods retail sales in China were CNY 7.7 trillion.
If Alibaba can capture 25-35% market share in underdeveloped areas through its omnichannel initiatives, we estimate that the company could generate between 3.75 trillion (48%) and 5.25 trillion (68%) in additional revenue.
From 2015 to 2020, the volume of e-commerce transactions in rural areas increased 5 times.
We believe that the growth potential for Alibaba is huge and ignores the need for long-term investment.
© Morningstar, 2020 – The information contained herein is for educational purposes and is provided for informational purposes ONLY. It is not intended to be, and should not be construed as, an invitation or inducement to buy or sell listed securities. Any comment is the opinion of its author and should not be taken as an individual recommendation. The information in this document should not be the only source for making an investment decision. Be sure to consult a financial advisor or financial professional before making any investment decisions.
