What Will Justify $100 Price Estimate For Alibaba Group?

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Alibaba Group

We recently launched Alibaba’s (NYSE:BABA) coverage with our DCF-based valuation of its stock at $80 per share, which implies a meaningful premium to its IPO price of $68 per share. Yet on its first day of trading the stock closed at $94 per share, nearly 40% above the IPO level. Our launch note highlighted key drivers behind our valuation (read Initiating Coverage Of Alibaba At Price Estimate Of $80 Per Share). In this note, we’ll look at some potential upside scenarios for Alibaba’s valuation. Specifically, we’ll try to identify factors that could justify $100 price estimate for the company. In our opinion, Alibaba will need to accelerate the growth in average spend per active buyer for its China marketplaces, expedite efforts to increase mobile monetization to desktop levels and substantially grow its international business. Let’s look at each of these in detail. Note that our price estimate is based on a diluted share count which includes potential dilution due to the exercise of outstanding options and restricted stock units (RSUs). Overall, we value Alibaba’s business at little over $200 billion.

Our price estimate for Alibaba stands at $80, roughly  10% below where the stock now trades.

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See our complete analysis for Alibaba

Average Annual Spend Per Active Buyer Reaches RMB 14,000 ($2,392) By 2021 (+$10)

We currently expect the average annual spend per active buyer on Alibaba’s China marketplaces to jump from RMB 7,808 ($1,271) in 2013 to about RMB 12,270 ($2,096) by the end of our forecast period (year 2021). This figure represents the average amount spent by Chinese retail and wholesale buyers on Taobao, Tmall, 1688.com and Juhuasuan. However, the expectation that this figure could reach past RMB 14,000 ($2,392), approximately 15% higher than we currently predict, would add additional $10 to our price estimate. So what could drive this incremental growth?

Broadly speaking, continued improvement in online security and quality assurance, growth in product assortments, enhancement in online payment systems and accelerated shift to mobile commerce could increase the growth in average online spend per buyer. Out of these, we believe that an accelerated shift to mobile commerce and better quality control process from Alibaba could have the greatest impact.

Mobile GMV stood at an estimated 1.8% of Alibaba’s China marketplaces GMV (gross merchandise volume) in 2011. [1] This figure jumped to an estimated 15% in calendar year 2013, and stood at well over 30% for the quarter ended June 30 2014. In absolute terms, mobile GMV grew from RMB 11 billion in 2011 to RMB 232 billion in 2013. As mobile’s contribution skyrocketed in 2013, the absolute increase in average spend per active buyer went up compared to 2012. Although this shift to mobile may put pressure on Alibaba’s monetization in short term, it will accelerate the growth in online spending by making it easier for consumers to shop from anywhere. In addition, we believe that better quality control from Alibaba will encourage both buyers and sellers to use its marketplaces more. Currently there is a large number of counterfeit products on Alibaba’s China marketplaces which discourages some buyers to opt for online purchases, and also causes concern among global brand merchants.

Marketing Revenue As % Of Gross Merchandise Volume Reaches Past 2.2% (+$5)

Online marketing services business is Alibaba’s biggest revenue source. Marketing revenue as % of gross merchandise volume increased sharply up to 2012 but stabilized in 2013. This can be attributed to the jump in mobile commerce where monetization rates are currently low. Most merchants are still not willing to divert a meaningful chunk of their marketing budget towards mobile platform. Therefore, we forecast only modest increase in this figure and expect it to reach close to 2% by the end of our forecast period. However, were this figure could reach 2.2% instead, it would add roughly $5 to our current price estimate. In order to achieve this, we believe that mobile and desktop monetizations will need to converge soon.

International Commerce Revenues Reach RMB 36 Billion ($6.15 billion) By 2021 (+$5)

We estimate that international e-commerce, retail as well as wholesale, accounts for only 6% of Alibaba’s value. This is primarily due to the fact that the growth in this business segment has been much slower than the growth in Alibaba’s China marketplaces. This is likely to remain the case going forward. We currently forecast revenues from Alibaba’s international marketplaces to reach RMB 15 billion ($2.56 billion) by the end of our forecast period. However, if this figure were to reach RMB 36 billion instead, it could add another $5 to our current price estimate for Alibaba. This may be an ambitious scenario, but it could be achievable considering growing stronghold of the company’s business in Russia, Brazil and the U.S. All these markets are big enough to provide incentive for Alibaba to expand. The company could accelerate its international revenue growth by localizing its websites and products, improving quality standards and delivery efficiency.

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Notes:
  1. Alibaba’s SEC filings []