Alibaba Earnings: Higher Sales Growth Offset by Increasing Investments

Key Morningstar Metrics for Alibaba Group

• Fair Value Estimate: $100.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Alibaba Group’s Earnings

Alibaba Group’s BABA June-quarter results are on track to meet our full-year estimate. However, there are mixed messages in the report, 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 our fair value estimate to $100 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 accounted for 58% of the current market cap as of June. We think our valuation can be driven higher if Alibaba proves it can consistently maintain or regain market share for Taobao and Tmall Group while improving margins and expediting capital return to shareholders.

We’re encouraged by management’s reiteration that the take rate (customer management revenue/gross merchandise volume) will pick up and cloud revenue, excluding Alibaba’s consolidated subsidiaries, will return to double-digit growth in the second half of fiscal 2025 (ending March). Management now expects the businesses outside e-commerce and cloud to break even in one to two years and become profitable after that. Nonetheless, we think these positives will be offset by continuous investments in Taobao and Tmall which could pressure the bottom line, growing losses in Alibaba International Digital Commerce group in the near term as it expands, potentially slower-than-expected turnaround in the businesses outside of e-commerce and cloud, and large capital expenditure on AI.