Morningstars Fair Value Estimat: 90 USD
Investeringsanalyse, R.J. Hottovy, 10-03-2015
By operating some of the world’s largest online marketplaces, Alibaba benefits from a strong network effect in the rapidly growing e-commerce industry in China. The firm has played a prominent role in China’s structural transition to online shopping from brick-and-mortar retail the past decade. Alibaba’s three major marketplaces--Taobao, Tmall, and Juhuasuan--together generated a gross merchandise volume, or GMV, of CNY 2.274 trillion ($361 billion) in calendar 2014, more than Amazon and eBay combined (more than $150 billion and $83 billion, respectively). As a third-party e-commerce platform operator, Alibaba allows millions of buyers and sellers to connect, explore, and transact with each other. The company boasted 334 million annual active buyers as of Dec. 30, 2014.
As China’s e-commerce market rapidly shifting from C2C to B2C, we believe Taobao will be instrumental in helping Alibaba adapt to changes in China's e-commerce landscape. Taobao's dominant network effect enhances Alibaba's entire ecosystem, providing low-cost organic traffic for Tmall and other B2C marketplaces while reducing a reliance on a salesforce for marketing services, also providing Alibaba additional cost advantages.
Alibaba's success with desktop transactions also gives the company key advantages against its competitors on the mobile end. Its trusted brand and self-reinforcing ecosystem convince us that the firm can copy its success to the mobile commerce market. Taobao's mobile app is already China's most popular mobile commerce app by user base. According to iResearch, Alibaba has been able to expand its market share in the mobile commerce market to 88% in the fourth quarter of 2014 from 83% in the same period in 2013.
We expect the firm to benefit from several macroeconomic, socioeconomic, and industry tailwinds. Continuous wealth creation and steady income growth among China's middle classes should enlarge the wallet share of users on Alibaba’s marketplaces. The relatively young user profile ensures the longevity of its network effect, while further penetration of broadband and mobile devices will fuel the user growth and increased monetization rates.
Note, R.J. Hottovy, 10-03-2015
Alibaba ended its fiscal year on a high note, with active buyers up 37% to 350 million (including 289 million active mobile users), gross merchandise per active buyer up 8.4%, and total GMV up 40% to RMB 600 billion. These trends lend further support to the network effect underpinning our wide moat and suggest that recent market concerns about increased competition may have been overblown. Additionally, some of our concerns about monetization rates were assuaged by improved marketing revenue growth, suggesting that sellers are adjusting to cost-per-click advertising changes; higher year-over-year mobile monetization rates; and contribution from commission-based Tmall, which grew GMV by 62%, aided by the addition of new key large global brands. Each of these components plays a role in our longer-term revenue outlook, which calls for average annual growth in the mid-to-high 20% range from fiscal 2016-20.
Fourth-quarter operating and adjusted EBITDA margins fell short of expectations--coming in at 30% and 49%, respectively--due to the stronger-than-expected mobile GMV growth, which currently carries lower monetization rates than nonmobile transactions, but is expected to rise over time due to increased buyer/seller usage and data-enriched marketing capabilities. Many of management's 2016 strategic investments strike us as appropriate--including mobile, rural customers, local services, cross border, and cloud computing capabilities--but as these investments wind down and core business (where management expects adjusted EBITDA margins to remain in the high 50s going forward) remains stable, we continue to expect significant margin expansion in the years to come.
Taken together, we're not planning material changes to our $90 fair value estimate outside of time value of money adjustments. Shares trade at only a modest discount to our fair value estimate following the fourth-quarter update, but we remain optimistic about the company's longer-term free cash flow potential.
Bulls and bears say
Bulls say
- Alibaba has 334 million active buyers as of December 2014, representing 20% of China’s population. We expect a long runway of user growth in the coming years.
- The company is strongly positioned to benefit from the structural shift from C2C to B2C in China’s e-commerce market, as Tmall can gain significant organic user traffic from Taobao and better monetize transactions.
- Almost 70% of Chinese online shoppers born in the 1990s consider Taobao as their first online shopping choice. Their loyalty and user habit suggest a lifetime of potential transactions.
Bears say
- The firm has invested in some businesses that might not significantly improve its ecosystem. This could distract management or result in poor allocation of capital.
- Despite its dominance in China, we believe the road to overseas expansion will be an challenge for Alibaba due to the network effects of e-commerce rivals in other regions.
- Rapid expansion of other e-commerce players like JD.com, VipShop, and Amazon could limit the growth potential of Alibaba in some specific product categories.
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