Morningstar

Alibaba's Revenue Outlook Ambitious but Possible

Three sources of upside will lead to an increase in our fair value estimate for the wide-moat firm.

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

The big news coming out of the first day of

On the first question, we do see fiscal 2018 revenue guidance as possible, while ambitious. While our model had assumed 36% revenue, we see three sources of upside. The first is better use of data for merchants, particularly "new retail" strategies that aim to give merchants access to personalized mobile marketing and content opportunities. The second is globalization, as third-party merchants are having early success reaching Lazada's users in Southeast Asia. The final source is AliCloud, which continues to post impressive paying customer trends and adoption of value-added content delivery and database services.

Investors should note that each of these sources implies a strong network effect, which is the foundation of our wide moat rating. CFO Maggie Wu shared impressive user engagement and behavior metrics, including a sharp increase in the number of orders placed and categories shopped each year a user remains on the platform. A strong network effect should allow Alibaba to monetize other growth avenues, and with greater color on new retail, globalization, and cloud strategies, we see a path to mid- to high 20s average annual revenue growth the next five years (versus earlier estimates of 22%).

We'll wait until the end of the investor event to finalize our estimates, but adjusting our five-year revenue outlook will add $10-$20 to our $130 fair value estimate, assuming adjusted margins EBITDA in the low to mid-40s over the next five years.

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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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