Why Alibaba’s Stock Has Surged This Year; Price Estimate Revised To $118

Alibaba (NYSE:BABA) has been one of the fastest growing large-cap stocks over the last few months. Alibaba’s stock has surged from less than $90 at the beginning of the year to $145 currently – with its market cap growing from around $230 billion to $375 billion. The company has reported strong quarterly results over the last few quarters, with the recent high-profile acquisitions of Lazada and Youku Tudou making substantial contributions to the top line growth. In addition, the company has made significant investments in a few supermarket chains (Sanjang Shopping and Lianhua), a movie production company, a payment gateway, a car technology startup and a biometric authentication technology startup in the last nine months alone.

More recently, Alibaba announced that it has invested another $1 billion in southeast Asia-based e-commerce company Lazada to take its stake up from 51% to 83%. Following this announcement at the end of last month, Alibaba’s stock price jumped fro $125 to $142. Earlier this week, the company unveiled the Tmall Genie X1 Voice-Activated Speaker, a competing product to Amazon’s (NASDAQ:AMZN) Echo.

Below we take a look at how Alibaba’s foray in multiple markets impacts its various segments and the factors driving growth in each segment. We have a revised $118 price estimate for Alibaba, which is around 20% lower than the current market price.

Aggressive Expansion Across Segments

As shown in the table below, Alibaba has reported strong revenue growth across all segments. The Digital Media & Entertainment and International Commerce segments were boosted by the additions of online video streaming platform Youku Tudou and e-commerce company Lazada. In addition, Alibaba’s core retail e-commerce operations in China, as well as its cloud computing business, continued to grow at healthy rates.

Alibaba’s core e-commerce business in China includes websites Taobao, Tmall and Juhuasua, and has provided consistent growth for the company over the last few years, with revenues growing from RMB 30 billion in fiscal 2012 to RMB 115 billion in FY 2017. Revenues in the segment have grown due to an increase in the total number of buyers as well as the average spend per buyer. The total number of active buyers have increased from under 200 million in 2013 to over 450 million at the end of the most recent quarter. In the March quarter of 2017, Alibaba reported that the total number of active mobile buyers stood at 493 million, higher than non-smartphone buyers. With smartphone and internet penetration increasing in China, this trend could boost the total number of people shopping on Alibaba’s websites.

As customers continue to buy more products online, this will likely lead to a higher average spend per customer. The average spend per buyer per year has also gone up from around RMB 6,000 (around $900) in 2011 to RMB 8,300 (over $1,200) in 2016. We forecast this metric to increase to over RMB 11,000 (or $1,600) by the end of our forecast period.

International e-commerce revenues were boosted by the addition of Lazada to Alibaba’s Southeast Asian operations. International retail revenues were up by over 3 times to RMB 7.3 billion in the fiscal year ended March. This led the combined international retail and wholesale revenues to increase by 75% over the previous year to RMB 13.3 billion.

Similarly, Digital Media and Entertainment revenues combined were up 270% to almost RMB 15 billion with the addition of Youku Tudou largely driving revenue growth. Alibaba’s digital media and entertainment businesses had over 500 million mobile MAUs by the end of fiscal 2017. The company’s Innovation Initiatives segment includes digital mapping services, enterprise communication and collaboration platform and presumably other new investments. This segment also grew by around 65% in FY’17 to RMB 3 billion.

Additionally, Alibaba reported a massive 120% annual increase in Cloud Computing revenues to RMB 6.7 billion in Fy’17. The growth in revenues was largely due to a 70% increase in the total number of paying customers for cloud computing and internet infrastructure offerings from 513,000 customers in March of last year to 874,000 this year. ^[1] This number is expected to increase given the huge demand for internet infrastructure across China and other Asian markets. As a result, we expect strong growth in Cloud Computing revenues for Alibaba in the coming years.

In terms of operating profits, Alibaba’s adjusted EBITDA grew by 42% year-over-year to just under RMB 75 billion. The rate of growth in operating profits was lower than revenue growth since the company invested heavily in its smaller non-commerce segments in addition to SG&A and product development expenses. These expenses include content acquisition costs paid for online media, logistics costs for e-commerce, traffic acquisition and bandwidth costs, payment processing fees paid to payment gateway Alipay. With Alibaba expected to continue to make investments, Alibaba’s EBITDA margin could remain low in the near term. In the long run, the company-wide margins can improve in the long run given the relatively low variable costs, due to which the company’s operating leverage will remain high. Consequently, we forecast Alibaba’s adjusted EBITDA margin to increase to around 55% by the end of our forecast period.

Despite a fall in EBITDA margins in recent years, Alibaba’s diluted non-GAAP EPS was around 40% higher at RMB 23.44 for the full year.

Based on our revenue and EBITDA forecasts for 2017, our valuation for Alibaba currently stands at just under $300 billion, as shown below. Our valuation is around 20% lower than the company’s current market capitalization. You can modify the interactive charts in this article to gauge the impact changes in individual drivers for Alibaba can have on our price estimates for the company.

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1. Alibaba Q4 FY 2017 Earnings Call Transcript, Seeking Alpha, May 2017 [↩]