Why We Increased Our Price Estimate For Alibaba By 15% To $200

Alibaba (NYSE:BABA) reported its results for fiscal fourth quarter and full year 2019 on May 15. The company beat consensus estimates on earnings and revenue. Alibaba has been following the ‘Amazon Model’ of growth with a focus on Chinese consumption, and its intense focus on various retail initiatives should continue to drive strong revenue growth in the near future. An important factor that works in Alibaba’s favor is its small exposure to the U.S. – limiting the impact of extended tariff embargoes on its top line. Lastly, the company’s strategy of leveraging synergies in its businesses and amplifying it against a large, under-penetrated retail base should support its growth ambitions. Owing to the momentum in business, we have upped the Trefis price estimate for Alibaba to $200 per share. 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 5 sources of Alibaba’s revenue ($56 billion in fiscal 2019) are:

• China Commerce (fiscal 2019 revenue of $37 billion, 66% of total revenue): Segment revenues are derived from retail e-commerce and associated marketing services in China.
• Digital Media & Innovation Initiatives (fiscal 2019 revenue of $4 billion, 8% of total revenue): Segment revenues are derived from content subscription, software subscription and merchant advertising offerings.
• China Wholesale & Other (fiscal 2019 revenue of $7 billion, 13% of total revenue): Segment revenues are derived from wholesale commerce and logistics services, primarily driven by Chinese consumption.
• International Commerce (fiscal 2019 revenue of $4 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 2019 revenue of $4 billion, 7% of total revenue): Segment revenues are derived based on customers’ duration and usage of Alibaba’s service.

Alibaba added $33 billion in total revenues from 2017 to 2019 – representing an average annual growth rate of 56%.

Summarizing Performance Trends During Q4, And Our Forecast For Full-Year 2020

• China Commerce revenue trends: Q4 – $8.7 billion (+36% y-o-y), 2019 – $36.9 billion (+31% y-o-y). Over 2017-19, the segment added a total of $20.3 billion at a CAGR of 49%. In 2020, we expect the segment revenue to reach $49.1 billion (+33% y-o-y). The traction seen by the company (addition of nearly 77 million consumers in China core marketplace business in lower-tier cities) through integrating local consumer services businesses within Alibaba, coupled with the company’s deep competitive moat in China is likely to make the segment stand out.
  • China Commerce Commissions revenue trends: Q4 – $4.5 billion (+148% y-o-y), 2019 – $9.2 billion (+24% y-o-y). Over 2017-19, the segment added a total of $4.3 billion at a CAGR of 36%. In 2020, we expect the segment revenue to reach $11.5 billion (+25% y-o-y).
  • China Commerce Marketing Services revenue trends: Q4 – $2.2 billion (-40% y-o-y), 2019 – $21.7 billion (+19% y-o-y). Over 2017-19, the segment added a total of $10.4 billion at a CAGR of 39%. In 2020, we expect the segment revenue to reach $27.1 billion (+25% y-o-y).
  • China New Retail revenue trends: Q4 – $2 billion (+117% y-o-y), 2019 – $6 billion (+138% y-o-y). Over 2017-19, the segment added a total of $5.6 billion at a CAGR of 304%. In 2020, we expect the segment revenue to reach $10.5 billion (+75% y-o-y). The segment has become a key driver for the company due to Alibaba’s investment in local consumer services and focus on digital transformation of brick-and-mortar retailing.
• Digital Media & Innovation Initiatives revenue trends: Q4 – $1 billion (+3% y-o-y), 2019 – $4.3 billion (+18% y-o-y). Over 2017-19, the segment added a total of $1.7 billion at a CAGR of 29%. In 2020, we expect the segment revenue to reach $5.6 billion (+30% y-o-y).
• China Wholesale & Other revenue trends: Q4 – $2 billion (+130% y-o-y), 2019 – $7.2 billion (+170% y-o-y). Over 2017-19, the segment added a total of $6.2 billion at a CAGR of 177%. In 2020, we expect the segment revenue to reach $9 billion (+25% y-o-y).
  • China Wholesale revenue trends: Q4 – $0.4 billion (+27% y-o-y), 2019 – $1.5 billion (+30% y-o-y). Over 2017-19, the segment added a total of $0.7 billion at a CAGR of 34%. In 2020, we expect the segment revenue to reach $1.9 billion (+25% y-o-y).
  • Cainao Logistics & Other revenue trends: Q4 – $1.6 billion (+184% y-o-y), 2019 – $5.7 billion (+276% y-o-y). Over 2017-19, the segment added a total of $5.6 billion at a CAGR of 619%. In 2020, we expect the segment revenue to reach $7.1 billion (+25% y-o-y).
• International Commerce revenue trends: Q4 – $1.1 billion (+17% y-o-y), 2019 – $4.1 billion (+24% y-o-y). Over 2017-19, the segment added a total of $2.2 billion at a CAGR of 46%. In 2020, we expect the segment revenue to reach $5.7 billion (+39% y-o-y).
  • International Commerce Retail revenue trends: Q4 – $0.7 billion (+17% y-o-y), 2019 – $2.9 billion (+29% y-o-y). Over 2017-19, the segment added a total of $1.8 billion at a CAGR of 65%. In 2020, we expect the segment revenue to reach $4.4 billion (+50% y-o-y).
  • International Commerce Wholesale revenue trends: Q4 – $0.3 billion (+17% y-o-y), 2019 – $1.2 billion (+15% y-o-y). Over 2017-19, the segment added a total of $0.3 billion at a CAGR of 18%. In 2020, we expect the segment revenue to reach $1.4 billion (+11% y-o-y).
• Cloud Computing revenue trends: Q4 – $1.2 billion (+65% y-o-y), 2019 – $3.7 billion (+72% y-o-y). Over 2017-19, the segment added a total of $2.7 billion at a CAGR of 95%. In 2020, we expect the segment revenue to reach $5.9 billion (+60% y-o-y).

In 2020, we expect Alibaba’s revenue to reach $75.2 billion (+34% y-o-y), and forecast its EPS figure to be $4.97. Taken together with our forward P/E multiple of 40x for the company, this works out to a $200 per share price estimate for the company’s stock, which is 15% above the current market price.

Do not agree with our forecast? Create your own price forecast for the Alibaba by changing the base inputs (blue dots) on our interactive dashboard.