Morningstar

Alibaba's Network Effect Drives Strong Commerce Revenue

We'd prefer a wider margin of safety, but we view the firm as one of the more diversified long-term cash flow stories across our global coverage.

Securities In This Article
Alibaba Group Holding Ltd ADR
(BABA)

In our view, two things stood out from

Core commerce revenue growth accelerated to 45% despite a deceleration in annual buyers (up 9% year over year to 443 million). This implies an impressive 31% increase in revenue per active buyer (CNY 241, up from CNY 184 a year ago), lending additional support to the network effect underpinning our wide moat while reinforcing our views about the longer-term spending potential of Chinese consumers. While there are questions about implementation strategies and investment needs, we’re intrigued by Alibaba’s “new retail” platform--which aims to give traditional merchants access to personalized mobile marketing and content opportunities for a differentiated shopping experience--and believe this offers another avenue of long-term growth (with recent investments in Sanjiang Shopping Club and Intime Retail offering test cases to develop solutions).

With strong third-quarter growth trends, we also remain optimistic about Alibaba's cloud and digital media/entertainment segments, which we expect to grow 60% and 70% annually the next five years. However, our model also factors in heavy near-term investments for these segments, with adjusted consolidated EBITDA margins contracting to the 43% range over the next few years (versus 46% in 2017) before returning to the mid- to high 40s in the later years of our forecast period.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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