How Will Regulatory Oversight, Trade War Impact Alibaba Post-Q3 Earnings?

Alibaba (NYSE:BABA) reported its Q3 earnings on January 30. The company beat market expectations on EPS while coming in slightly lower on revenue. Encouragingly, China retail remains strong and the company’s management continues to see strong growth on the Alibaba platforms. While we believe Alibaba’s user base can keep the company in good shape, developments on the U.S.-China trade disputes are likely to be an overhang on the stock price.

We currently have a price estimate of $173 per share for Alibaba, which is around 15% higher than the current market price. Our interactive dashboard on Alibaba’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation.

At the onset, Alibaba’s management tried to address the elephant in the room: Internet regulation in China and the fallout of the U.S. trade tensions. Management believes that since Alibaba is a play on Chinese domestic consumption, the impact from the trade war to the company is quite limited. On regulation, the company believes that it is well-positioned to adapt to regulation and believes that policy actions taken in the interest of the broader business community will also benefit Alibaba. Some more brief takeaways are below:

• Annual active consumers on China retail marketplaces reached 636 million (+35 million q-o-q)
• Mobile MAUs on China retail marketplaces reached 699 million (+33 million q-o-q)
• Revenue from core commerce grew to $15 billion (+40% y-o-y). Taobao saw strong growth across lower tier cities, while Tmall physical goods GMV grew 29% y-o-y. In New Retail, the company continues to digitize physical stores and expand the footprint of its retail chain Freshippo (formerly Hema).
• The company completed the creation of the local consumer services (combination of food delivery platform Ele.me and local service guide platform Koubei) business, and was also financed by equity from Softbank.
• Cainiao Network processed over 1 billion delivery orders during the 2018 11.11 Global Shopping Festival. In the international segment, the company also focussed on strengthening Lazada’s third-party marketplace business.
• Revenue from cloud computing grew to $962 million (+84% y-o-y), largely driven by enterprise customers. In November 2018, Jeff Zhang was appointed as the president of Alibaba Cloud in addition to his existing responsibility of Chief Technology Officer.
• Revenue from digital media and entertainment grew to $944 million (+20% y-o-y). Youku’s average daily subscribers grew 64% y-o-y. The company also moved towards increasing its stake in Alibaba Pictures to approximately 51%. Luyuan Fan, the Chairman and CEO of Alibaba Pictures, was named the president of Alibaba’s digital media and entertainment business.
• Revenue from innovation initiatives and others grew to $193 million (+73% y-o-y).

Alibaba’s management noted that on the Alibaba platforms, Chinese consumption growth continues to be strong, driven by “a growing base of increasingly affluent young consumers.” While macroeconomic concerns continue to persist, the company has been focussing on technology and its own infrastructure to mitigate the impact to merchants.

We believe that the company continues to enjoy strong momentum, and the domestic consumption story is likely to continue given the Chinese stimulus package. However, management’s claim of its relative insulation from regulatory headwinds and trade war may be a bit optimistic, warranting some caution.