Investeringskommentar, R.J. Hottovy, 13/08/2015
By operating some of the world’s largest online marketplaces, Alibaba has played a prominent role in China’s structural transition to online and mobile shopping from brick-and-mortar retail, developing a strong network effect in the process. Alibaba’s major marketplaces--Taobao, Tmall, and Juhuasuan--together generated 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.
Alibaba's trusted brand and self-reinforcing ecosystem gives us greater confidence that the firm can replicate its success in mobile commerce. Mobile transactions (55% of total GMV) currently carry lower monetization rates than nonmobile transactions, but we expect this to rise over time due to increased buyer/seller usage and data-enriched marketing opportunities.
We're lowering our fair value estimate to $84 per ADS from $90 based on a moderate reduction to our near-term top-line and margin assumptions following slightly lower-than-anticipated first-quarter 2016 revenue growth trends and ongoing technology, infrastructure, and content investments. Our fair value estimate implies a fiscal 2016 price/earnings ratio of 32 times, which appears lofty using traditional multiple-based methodologies but also warranted, given Alibaba's tremendous ability to generate cash, promising business prospects, and dominant position in one of the fastest-growing e-commerce industries in the world.
We believe mounting e-commerce competition will force Alibaba to continue investing in technology infrastructure, user acquisition, and personnel. As a result, we expect some margin contraction over the near term, with gross margins declining to around 66% and adjusted EBITDA margins contracting to the high 40s the next few years amid technology, product development, online/offline and local services, and marketing investments (compared with 69% and 54%, respectively, in fiscal 2015). However, we expect margin trends to inflect in 2020 as the current investment cycle winds down, bringing our fiscal 2025 gross and operating margin estimates back closer to fiscal 2015 levels.
Bulls Say
- Alibaba boasted 367 million active buyers as of June, representing more than 20% of China’s population. We expect a long runway of user growth in the coming years.
- We believe the company is well 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 habits indicate a lifetime of potential transactions.
Bears Say
- Despite its dominance in China, we believe the road to overseas expansion will be a challenge for Alibaba due to the network effects of local 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.
- 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.
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