After Earnings, Is Alibaba Stock a Buy, a Sell, or Fairly Valued?

Alibaba Group Holding BABA released its third-quarter earnings report on Nov. 15. Here’s Morningstar’s take on Alibaba’s earnings and stock.

Key Morningstar Metrics for Alibaba Group Holding

• Fair Value Estimate: $100.00
• Morningstar Rating: 3 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Alibaba Group Holding’s Q3 Earnings

• Year-over-year growth for Alibaba’s gross merchandise volume should be in the low single digits, underperforming JD.com’s JD high-single-digit GMV and PDD Holdings’ PDD low 20s.
• Despite losing GMV market share in the quarter, Taobao Tmall Group’s adjusted EBITA was down 5% year over year due to investments in competitively priced products and customer services.

Fair Value Estimate for Alibaba Group Holding

With its 3-star rating, we believe Alibaba’s stock is fairly valued compared with our long-term fair value estimate of $100 per share. Alibaba’s ratio of China retail marketplace gross merchandise volume to China’s retail sales of consumer goods reduced for the first time in a year, down 100 basis points from our estimate in the year ended March 2023 to 17%. We estimate this ratio continued to reduce to 16%, and we expect it to go to 14% in a decade. We think the GMV/online sales of physical goods ratio will decline from 59% in the year ended March 2024 to 46% a decade later. Considering intensive competition to acquire merchants and a shift toward recruiting more small and white-label merchants, we assume monetization of the China retail marketplace to be flattish in the coming decade.

Read more about Alibaba Group Holding’s fair value estimate.

Economic Moat Rating

Despite increasing competition, we’re maintaining our wide economic moat rating for Alibaba, based on the firm’s strong network effect. Alibaba is monetizing its network effect better than any other e-commerce platform in China. The short video platforms Douyin and Kuaishou have not proved they can monetize the physical goods e-commerce market with a durable profit margin, but Alibaba has been profitable for a decade, and we believe it will remain profitable for the next 20 years.

In addition, we think Kuaishou and Douyin’s livestreaming e-commerce supplements mainstream e-commerce rather than replacing it. Livestreaming e-commerce tends to satisfy impulsive purchases instead of planned or urgent ones. The return/refund ratio of livestreaming is high, which we think is inherent in that impulsive nature. This makes it difficult for brands to solely rely on this channel in the long term.

Read more about Alibaba Group Holding’s economic moat.

Financial Strength

Alibaba is in sound financial health. As of September 2023, the company had CNY 572 billion in cash and short-term investments on its balance sheet against CNY 166 billion in short- and long-term bank borrowing and unsecured senior notes. We believe the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives. We think the company can increase its cash dividend and the size of its share repurchase program. We expect the company to substantially reduce the pace of acquisitions and focus on selling non-core investments, which will further boost the company’s financial strength.

Read more about Alibaba Group Holding’s financial strength.

Risk and Uncertainty

We assign Alibaba a Very High Uncertainty Rating. China’s e-commerce landscape has become increasingly competitive, with PDD registering faster GMV and user growth and JD demonstrating its quality services amid covid-19. Short video platforms and Tencent TME have also entered the e-commerce sector. PDD’s number of active buyers in the year ended December 2020 surpassed Alibaba’s.

Alibaba’s largest environmental, social, and governance issue is its business ethics regarding anticompetitive measures. It was fined CNY 18.2 billion in April 2021 for forcing merchants to choose its platform exclusively, and the firm was required to curb its anticompetitive behavior. Chinese financial regulators have continuously scrutinized online financial services, leading to the cancelation of investee Ant Financial’s IPO. Alibaba has persistently faced counterfeit and infringing goods on its marketplaces. The Hangzhou government assigning representatives to work inside Alibaba also raises concerns, although there is not yet any evidence of value destruction.

Read more about Alibaba Group Holding’s risk and uncertainty.

BABA Bulls Say

• Alibaba can maintain or increase its GMV share in China’s e-commerce space, demonstrating its ability to execute its turnaround strategy.
• Alibaba successfully increases key metrics such as customer retention, purchase frequency, and average order value, driving GMV growth to outperform the growth of China’s online retail sales of physical goods.
• Alibaba delivers better-than-expected adjusted EBITA margins despite competition and reinvestment.

BABA Bears Say

• Alibaba’s GMV share in China could decrease faster than expected as competitors like Douyin successfully enter the search-based e-commerce business.
• Expansion into the nonphysical goods marketplace businesses and other regions could lead to lower-than-expected margins.
• Alibaba may falter in its globalization, public cloud, and AI efforts, or deliver slower-than-expected earnings growth.

This article was compiled by Kayleigh Hall.