Morningstar

Is Alibaba's Logistics Strategy a Long-Term Win?

The wide-moat firm's recent logistics investment may weigh on near-term margins, but it will create fulfillment and inventory storage bundling opportunities, which should drive improved monetization rates.

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Alibaba Group Holding Ltd ADR
(BABA)

We view positively

We estimate that Cainiao will benefit second-half revenue by roughly CNY 7 billion (which will bring our full-year revenue outlook to CNY 243 billion, putting the company ahead of its 2018 revenue growth forecast of 45%-49%) but will have a negative impact on operating income by CNY 2 billion, resulting in a CNY 1 billion net income hit after factoring in Cainiao's other equity partners. We plan to raise our fair value estimate to $185 per ADS from $175 based on new fulfillment opportunities with domestic and international merchants and greater China retail monetization rate assumptions (pushing 5% by fiscal 2027), partly tempered by lower adjusted EBITDA margins (mid-40s in fiscal 2027 versus previous high-40s assumptions).

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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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