Morningstar

Alibaba Still Undervalued Despite Leadership Change

We're keeping our fair value estimate for the wide-moat firm as Jack Ma steps away.

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

Jack Ma's decision to step away from wide-moat

We remain comfortable with our $240 fair value estimate and believe Alibaba is one of the more undervalued investment stories in the consumer category. We believe that negative trade war headlines have been masking steps to increase engagement among its existing user base and incubate new potential avenues of growth. Our fair value estimate assumes a revenue CAGR of almost 37% for fiscal 2019-23, including 61% growth in fiscal 2019 (consistent with management's 2019 revenue growth target of 60%, or 50% excluding acquisitions). We expect adjusted EBITDA margins to contract to the high-20s the next few years (versus 42% in fiscal 2018) due to technology, logistics, product development, and marketing investments as well as the impact of acquired businesses. However, we expect margins to inflect as investments wind down and nascent businesses scale, bringing our fiscal 2028 adjusted EBITDA margins back to the low- to mid-30s.

Despite our confidence in management's ability to execute following upcoming management changes, we will maintain our Poor equity stewardship rating due to questions about partnership voting rights, variable interest entity (VIE) structure, and convoluted ownership structure.

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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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