Three sources of upside will lead to an increase in our fair value estimate for the wide-moat firm.
By R.J. Hottovy, CFA | 06-08-17 | 11:16 AM | Email Article

The big news coming out of the first day of  Alibaba's 2017 investor event is revenue guidance calling for 45%-49% growth, well ahead of consensus and our estimates of 36%. This implies CNY 230 billion-236 billion for fiscal 2018 and suggests accelerating organic revenue year over year versus last year's 44%-45% growth after adjusting for Youku and Lazada. This leads us to two questions: (1) Are these numbers achievable? and (2) What does it tell us about the company's economic moat?

R.J. Hottovy, CFA, is a consumer strategist for Morningstar.

On the first question, we do see fiscal 2018 revenue guidance as possible, while ambitious. While our model had assumed 36% revenue, we see three sources of upside. The first is better use of data for merchants, particularly "new retail" strategies that aim to give merchants access to personalized mobile marketing and content opportunities. The second is globalization, as third-party merchants are having early success reaching Lazada's users in Southeast Asia. The final source is AliCloud, which continues to post impressive paying customer trends and adoption of value-added content delivery and database services.

Investors should note that each of these sources implies a strong network effect, which is the foundation of our wide moat rating. CFO Maggie Wu shared impressive user engagement and behavior metrics, including a sharp increase in the number of orders placed and categories shopped each year a user remains on the platform. A strong network effect should allow Alibaba to monetize other growth avenues, and with greater color on new retail, globalization, and cloud strategies, we see a path to mid- to high 20s average annual revenue growth the next five years (versus earlier estimates of 22%).

We'll wait until the end of the investor event to finalize our estimates, but adjusting our five-year revenue outlook will add $10-$20 to our $130 fair value estimate, assuming adjusted margins EBITDA in the low to mid-40s over the next five years.

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R.J. Hottovy, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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