Alibaba Likely To End Fiscal 2019 On A Strong Note Despite Macroeconomic Headwinds

Alibaba (NYSE:BABA) reports its results for fiscal fourth quarter and full year 2019 on May 15. In fiscal Q3 (ending December), the company had beat market expectations on EPS despite weaker-than-expected revenues. We expect the company’s fourth quarter performance to have been driven primarily by its China Retail segment, even as the company continues to benefit from synergies between its platforms. In light of recent geopolitical disturbances, we will also be closely watching for management commentary about the potential impact on Alibaba.

We currently have a fair value estimate of $173 per share for Alibaba, which is slightly below 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.

A Quick Look At Alibaba’s Revenue Sources

Alibaba makes money through its e-commerce, logistics, cloud, digital media and other subscription software. While the company reports its business in four segments, we have reworked its structure into five segments that better capture Alibaba’s business based on its operations. These fives sources of Alibaba’s revenue ($40 billion in fiscal 2018) are:

• China Commerce (fiscal 2018 revenue of $28 billion, 71% of total revenue): Segment revenues are derived from retail e-commerce and associated marketing services in China.
• Digital Media & Innovation Initiatives (fiscal 2018 revenue of $4 billion, 9% of total revenue): Segment revenues are derived from content subscription, software subscription and merchant advertising offerings.
• China Wholesale & Other (fiscal 2018 revenue of $3 billion, 7% of total revenue): Segment revenues are derived from wholesale commerce and logistics services, primarily driven by Chinese consumption.
• International Commerce (fiscal 2018 revenue of $3 billion, 7% of total revenue): Segment revenues are derived from retail and wholesale operations as well as from advertising services outside China.
• Cloud Computing (fiscal 2018 revenue of $2 billion, 5% of total revenue): Segment revenues are derived from based on customers’ duration and usage of Alibaba’s service.

Alibaba added $24 billion in total revenues from 2016 to 2018 – representing an average annual growth rate of 59%.

Summarizing Performance Trends Over Recent Quarters, And Our Forecast For Full-Year 2019

• China Commerce revenues have grew at a CAGR of 51% over the last two years. While growth in these revenues for the first nine months of fiscal 2019 was 35%, we expect the growth rate for full-year 2019 to be 43%. For the first three quarters of fiscal 2019:
  • China Commerce Marketing Services, which is the largest component of China Commerce segment reported a 23% jump in revenues compared to the first nine months of 2018
  • China Commerce Commissions reported a growth of 30%.
  • China New Retail revenues swelled by 160% compared to the first three quarters of 2018
• Digital Media & Innovation Initiatives has seen revenues grow at a CAGR of 95% over the last two years. Growth for the 9M period in 2019 was 29% year-on-year, and we expect the growth rate to be 32% for full-year 2019
• China Wholesale & Other revenues have grown at a CAGR of 100% over the last two years, and witnessed accelerated growth of 200% over the first nine months of 2019. We expect the growth rate for full-year 2019 to be 83%
• International Commerce revenues have grown at a CAGR of 68% over 2016-18, but the growth rate was considerably subdued at 33% over the first nine months of 2019. We expect the growth rate to 42% for full-year 2019.
• Cloud Computing revenues have seen exceptionally strong growth rates of 114% over the last two years, and growth remained strong at 84% for the first nine months of 2019. The growth rate for full-year 2019 is likely to be around 90%.

We forecast Alibaba’s EPS figure for full-year 2019 to be $5.97. Taken together with our forward P/E multiple of 29x for the company, this works out to a $173 per share price estimate for the company’s stock, which is slightly below the current market price.

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