How Much Can Chinese Stimulus Impact Alibaba’s Valuation?

With expectations that the U.S.-China trade may reach a resolution in the coming months, Chinese stocks have rallied this year. Following Alibaba’s (NYSE:BABA) Q3 results on January 30, we had noted that the company’s core business continues to enjoy strong momentum. Alibaba’s performance has been further protected from macroeconomic headwinds due to management’s focus on technology to drive consumption. Given Alibaba’s resilience to broader macroeconomic conditions, potential further Chinese stimulus could be significantly positive for the company’s results and stock, which has partly contributed to the rally so far this year. We believe the stock has rallied ahead of its fundamental value, which we estimate at $173 per share.

Estimating Impact To Alibaba’s Valuation

With the expectations of Chinese GDP slowing down, the Chinese government has been embarking on a slew of fiscal stimulus measures including tax cuts and issuance of municipal bonds. The rationale for fiscal stimulus is that when the government releases $1 in the economy, due to the cycle of spending and tax collection, the likely actual impact of the money released to the GDP is typically greater than the stimulus amount.

One way of estimating the impact of the stimulus is by using the marginal propensity to consume (MPC) or the quantification of increase in consumer spending due to an increase in disposable income. For China, we estimate the MPC to be around 0.38. Using laws of economics, we also know that the stimulus multiplier = 1/(1-MPC) (or 1.62 for China, based on our estimated MPC of 0.38). Thus, for a $1 stimulus released, the Chinese GDP is likely to grow by $1.62.

We therefore estimate the potential stimulus that the Chinese government could release in the economy, the consequent expansion to GDP and percentage of this GDP expansion that is likely to occur in 2019. In addition, we also consider a base rate GDP growth (without the stimulus) to ascertain the total GDP growth.

Furthermore, since Alibaba’s business performance has been dependent on the Chinese economy, we looked at the stock price performance and growth in GDP for the last three years. Over 2016-2018, the change in Alibaba’s stock price has displayed a strong correlation with the growth in GDP of 99.5%. This implies that if the GDP grows well, there is a very high chance of Alibaba’s stock price also performing well and vice versa.

Using regression, and as shown on our interactive dashboard, we estimate Alibaba’s stock price could potentially return 60% over its 2018 closing price or end 2019 at $219. This is well ahead of our $173 estimate based on the company’s fundamentals. You can modify any of the key drivers to visualize the impact of changes, and see all of our Technology company data here.

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