Alibaba: an intact ambition, ignored by the stock market

The measures presented by Ali Baba (“Wide Moat”) on its day of investors reassured us, particularly for its retail market business in China, with a retention rate of more than 90% for major consumers who contribute about 70% of the volume total transactions (GMV).

We believe, however, that market concerns were overlooked, leading to a lukewarm market reaction.

Investors worry about the lack of visibility on future capital expenditures, the duration of these investments, their long-term profitability, the future growth and the trend of the margins of Alibaba in China.

Alibaba continues to invest in its business, and management hinted at near-term revenue growth and deteriorating margins.

We believe the deceleration in near-term revenue growth is primarily due to merchant hoarding to battle competition.

With a higher share of lower-margin businesses, we expect some margin contraction in the medium term, with a consolidated non-GAAP adjusted EBITA margin of 13.7% in fiscal 2026 (vs. .8% in fiscal year 2021).

Nonetheless, we particularly appreciate the insight of Alibaba’s executives who want to grow the company in less-developed areas and leverage its comparative advantages to penetrate those markets.

Alibaba reminded us to operate a comprehensive merchant-supporting infrastructure, which we believe is an overlooked asset.

We maintain our estimate of Alibaba’s fair value at HK$182 (US$188) and our earnings forecast remains unchanged.

Alibaba’s competitive advantage lies in its ability to detect new consumer trends and its comprehensive merchant services system.

With a large and diverse merchant and user base, Alibaba is in a good position to gain retail insights and identify these trends.

This is important to drive growth in categories that are mature in online penetration, such as apparel and beauty products.

The comprehensive merchant services infrastructure includes its Business Advisor, Strategy Center, CRM, and Brand Databank platforms and tools, which can help with consumer and product lifetime value management.

Among the operational changes in marketplaces in China, 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 budget between search, feeds, marketing programs, and even third-party traffic to meet merchants’ needs.

Transaction volume generated per dollar of ad spend increased by 30% in A/B testing.

We believe there is potential for ROI as more traders adopt this new tool.

According to CEIC data, the value of retail sales in lower-tier cities and towns in 2020 reached 15 trillion renminbi (CNY), presenting significant opportunities for Alibaba.

In the fiscal year to the end of March 2021, Alibaba’s omnichannel physical goods retail volume in China was CNY 7.7 trillion.

If Alibaba can capture 25-35% market share in less developed areas through omnichannel initiatives, we estimate the company could generate between 3.75 trillion (48%) to 5.25 trillion (68%) renminbi additional.

Growth in rural e-commerce transaction volumes from 2015 to 2020 has increased fivefold.

We believe the potential for growth is too great for Alibaba to ignore and recognize that long-term investment is needed.

© Morningstar, 2020 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be considered an invitation or encouragement to buy or sell the securities listed. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to contact a financial advisor or finance professional before making any investment decisions.

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