We plan to raise the wide-moat online operator's $148 fair value estimate by 10%-15%.
's first-quarter update gave us our first chance to assess its ambitious fiscal 2018 revenue growth target of 45%-49%, and the company did not disappoint. While cloud, globalization, and digital media have been at the center of recent investor attention, it's easy to forget the strength of Alibaba's core China retail commerce platform, where revenue accelerated 57% (41% last quarter). We attribute much of the growth to new customer data management strategies that give merchants access to personalized mobile marketing and content, driving not only increased merchant and customer acquisition but also greater engagement. This is evidenced by accelerating mobile monetization rates (we estimate 3.6% versus 3.0% last quarter), which also support the network effect behind our wide moat rating.
R.J. Hottovy, CFA, is a consumer strategist for Morningstar.
Coupling this with strong cloud (up 96%) and international retail (up 136%) revenue trends, we now expect Alibaba to surpass the high end of its 2018 revenue targets and deliver 50% growth, even after factoring in Tmall customer acquisition and retention promotions and the anniversary of personalized customer data management efforts. Profitability was a pleasant surprise, with core commerce segment adjusted EBITA margins improved 170 basis points to 62.7% and all other segments except digital media narrowed their operating losses. This puts the company on target for adjusted EBITDA margins of 45%-46%, an increase from earlier estimates in the low 40s but still down from 47% a year ago because of stepped-up user experience, logistics, cloud, and content investments. Based on an increase in our five-year projected revenue compound annual growth rate to 27% (from 26%) and adjusted EBITDA outlook to the mid-40s (versus prior estimates in the low 40s), we plan to raise our $148 fair value estimate by 10%-15%. While we'd prefer a wider margin of safety, we still view the stock as one of the best ways to play longer-term Chinese consumption and mobile technology trends.
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