Alibaba Earnings: Higher Sales Growth Offset by Increasing Investments; Valuation Raised by 4%

Alibaba Group’s June-quarter results are on track to meet our full-year estimate. However, messages from the earnings are mixed as higher future top-line growth will be offset by rising investments. At the same time, we see uncertainty in the turnaround of businesses outside of e-commerce and cloud. We have rolled our model while keeping our estimates largely intact, leading to a 4% increase in fair value estimate to USD 100 per ADS (HKD 97 per share). Alibaba is currently undervalued, in our view, underpinned by our 10-year adjusted EBITA compound annual growth rate forecast of 3%. We estimate that cash, cash equivalents, and investments account net of debt, as of June, accounted for 58% of the current market cap. We think our valuation can be driven higher if Alibaba proves its ability to consistently maintain or regain market share for Taobao and Tmall Group while at the same time improving margins and expediting capital return to shareholders.