We'd prefer a wider margin of safety, but we view the firm as one of the more diversified long-term cash flow stories across our global coverage.
In our view, two things stood out from Alibaba
’s fiscal third-quarter update: the strength of its core commerce segment and greater visibility over the revenue trajectory and investment requirements for emergent businesses like AliCloud and digital media/entertainment. After adjusting our model for the strong top-line results--we now expect revenue to come in slightly ahead of management’s updated target of 53% growth year over year--we plan to raise our $105 fair value estimate by about 5%. While we’d prefer a wider margin of safety, we still view Alibaba as one of the more diversified long-term cash flow stories across our global coverage.
R.J. Hottovy, CFA, is a consumer strategist for Morningstar.
Core commerce revenue growth accelerated to 45% despite a deceleration in annual buyers (up 9% year over year to 443 million). This implies an impressive 31% increase in revenue per active buyer (CNY 241, up from CNY 184 a year ago), lending additional support to the network effect underpinning our wide moat while reinforcing our views about the longer-term spending potential of Chinese consumers. While there are questions about implementation strategies and investment needs, we’re intrigued by Alibaba’s “new retail” platform--which aims to give traditional merchants access to personalized mobile marketing and content opportunities for a differentiated shopping experience--and believe this offers another avenue of long-term growth (with recent investments in Sanjiang Shopping Club and Intime Retail offering test cases to develop solutions).
With strong third-quarter growth trends, we also remain optimistic about Alibaba's cloud and digital media/entertainment segments, which we expect to grow 60% and 70% annually the next five years. However, our model also factors in heavy near-term investments for these segments, with adjusted consolidated EBITDA margins contracting to the 43% range over the next few years (versus 46% in 2017) before returning to the mid- to high 40s in the later years of our forecast period.
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