Morningstar

Alibaba Doesn't Disappoint With Strong Start to 2018

We plan to raise the wide-moat online operator's $148 fair value estimate by 10%-15%.

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

Coupling this with strong cloud (up 96%) and international retail (up 136%) revenue trends, we now expect Alibaba to surpass the high end of its 2018 revenue targets and deliver 50% growth, even after factoring in Tmall customer acquisition and retention promotions and the anniversary of personalized customer data management efforts. Profitability was a pleasant surprise, with core commerce segment adjusted EBITA margins improved 170 basis points to 62.7% and all other segments except digital media narrowed their operating losses. This puts the company on target for adjusted EBITDA margins of 45%-46%, an increase from earlier estimates in the low 40s but still down from 47% a year ago because of stepped-up user experience, logistics, cloud, and content investments. Based on an increase in our five-year projected revenue compound annual growth rate to 27% (from 26%) and adjusted EBITDA outlook to the mid-40s (versus prior estimates in the low 40s), we plan to raise our $148 fair value estimate by 10%-15%. While we'd prefer a wider margin of safety, we still view the stock as one of the best ways to play longer-term Chinese consumption and mobile technology trends.

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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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