A Closer Look At Our $171 Price Estimate For Alibaba

by Trefis Team
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BABA
Alibaba Group
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Alibaba’s (NYSE:BABA) stock has seen massive growth of late, with a 65% surge in its stock price in the last year. Alibaba reported strong double digit revenue growth across segments through the company’s fiscal 2018 ended March, which contributed to the valuation boom. It is interesting to note that the company has reported accelerated growth in revenues in its segments such as China Retail Commerce, International Commerce and Cloud Computing in spite of a large base factor. These expansion efforts have weighed on its operating margins in the last couple of years, with its adjusted EBITDA margin compressing from 52% in FY’16 to just over 42% in FY’18 due to increases in operating costs. However, this has not deterred the company from continuing to invest in order to see further growth. Accordingly, shareholder confidence has remained high and the stock has continued to perform well.

We have revised our price estimate for Alibaba from $136 to $171 based on a positive set of results and to account for accelerating revenue growth expected in the coming quarters. Our price estimate is still around 15% lower than the current market price. We have summarized our our expectations for Alibaba’s combined full year results for FY’19 on an interactive dashboard. In this note we take a look at our expectations for the full year and forecasts which we have revised from our previous estimate.

See Our Full Analysis For Alibaba

Sustained Growth Expected Across Segments

Alibaba’s core commerce revenues in China (particularly China Retail) have growth massively in recent years. China Retail revenues surged from $12.4 billion in FY’16 to $28.1 billion in FY’18. Annual growth rate accelerated from 34% in fiscal 2017 to a massive 70% in fiscal 2018. On of the key factors driving growth has been the increase in smartphone and internet penetration in China. The growth in the total number of mobile monthly active users (MAUs) has been significantly faster than the historic growth in non-smartphone users. The total number of mobile MAUs has surpassed the total annual active customers reported by Alibaba in recent quarters.

Similarly, the contribution of mobile users to total gross merchandise volume (GMV) has also increased considerably. The total GMV for Alibaba through FY’18 ended March stood at $768 billion – a 28% increase over FY’17. For context, total e-commerce retail sales in the U.S. through 2017 stood at $453 billion, 16% higher than 2016 levels according to a report by the U.S. Commerce Department. We expect the growth rate to remain high at around 30% through FY’19, with around $36.7 billion in revenues from China Retail. Similarly, the company has shown clear intent to expand its e-commerce business in international markets as well as expand to offline retail domestically, or what the company has branded as New Retail. We forecast Alibaba’s China Wholesale and Other (including New Retail) revenues to increase 25% for the year to $3.3 billion.

Beyond commerce, Alibaba has reported consistent triple digit revenue growth in its Cloud Computing segment in recent years. Revenues have roughly doubled every year from $468 million in FY’16 to $968 million in FY’17 to $2.1 billion in FY’18. We expect the trend to continue going forward, with revenues increasing at 85-90% through FY’19 to reach about $4 billion for the year. This is an upward revision from a 60% revenue growth forecast previously. Another area where the company has shown impressive results is its Digital Media and Innovation Initiatives segment. The video on-demand industry in China is growing rapidly, and has contributed meaningfully to Alibaba’s top line since it acquired video streaming service Youku Tudou for $3.7 billion in 2016. However, this business requires massive investment in order to produce new content and acquire traffic in order to compete with other services such as Baidu’s (NASDAQ:BIDU) iQiyi. We expect combined Digital Media and Innovation Initiatives to increase by around 35% for the year to $4.9 billion. Combined revenues are expected to increase at a conservative 37% to $54.6 billion through FY’19.

We forecast the company’s adjusted EBITDA margin to continue to fall gradually over FY’18 levels to just over 38% for FY’19. Continued expansion efforts and venturing into offline retail should limit margin improvement over the next couple of years. Similarly, we estimate the company’s EBITDA multiple at closer to FY’16 levels after trading at around 23 through FY’17 and FY’18. Based on these numbers, we can calculate the enterprise value for Alibaba to be around $408 billion. In our model we have kept the net cash balance at the most recently reported figure of around $42 billion.

Despite the upward revision of revenues and resulting operating profit forecasts, we have considered a conservative estimate for EBITDA multiples and profit margins for FY’19. If you disagree with our forecasts, you can change expected segment revenue, EBITDA margin and EBITDA multiple figures for Alibaba to gauge how it will impact the price estimate.

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