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

Alibaba Group Holding released its September-quarter earnings report on Nov. 25. Here’s Morningstar’s take on Alibaba’s earnings and stock.

Key Morningstar Metrics for Alibaba Group Holding

• Fair Value Estimate: $258.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Alibaba Group Holding’s September-Quarter Earnings

Alibaba’s adjusted EBITA declined 78% sequentially in the September quarter. It guided cloud revenue year-on-year growth will be “high,” instead of “accelerating,” in the coming quarters and that customer management revenue, or CMR, year-on-year growth will decelerate in the December quarter.

Why it matters: Adjusted EBITA missed our estimate due to higher quick commerce losses and increased investment in foundational models and artificial intelligence applications. We cut adjusted EBITA forecasts by 5%-7% during fiscal 2026-28 (ending March), but our midcycle earnings estimates are largely intact.

• We think Alibaba’s reluctance to guide accelerated cloud revenue growth stems from supply constraints due to component shortages, quarterly fluctuations in internal AI cloud usage, and a high comparison base.
• As Alibaba sees accelerating AI demand from customers and noted that guided capital expenditure might be too conservative, we keep our cloud revenue and higher-than-guided capex estimates largely unchanged. Its CMR guidance met our expectations.

The bottom line: We maintain our fair value estimates for wide-moat Alibaba at $258 per ADS. The shares are undervalued, as the market continues to underestimate management’s strong execution capabilities and Alibaba’s cloud business potential.

• Alibaba delivered on its promise to halve quick commerce unit economics, or UE, losses by October compared with July and August, while maintaining order volume share.
• Third-party data supports our bullish outlook in Alibaba’s AI cloud, as detailed in our report “Alibaba: China’s AI Cloud Giant.” On Hugging Face, over 180,000 derivative models had been developed based on Qwen as of Oct. 31, more than double the second-largest peer.

Fair Value Estimate for Alibaba Group Holding

With its 4-star rating, we believe Alibaba’s stock is moderately undervalued compared with our long-term fair value estimate of $258 per share. Alibaba’s ratio of China retail marketplace gross merchandise volume to China retail sales of consumer goods is expected to decline gradually in the medium term, by our estimate. Considering intense competition, we assume monetization of the China retail marketplace to be flattish after an increase due to the rollout of Quanzhantui and Quick Commerce.

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

Economic Moat Rating

Despite increasing competition, we’re maintaining our wide economic moat rating based on Alibaba’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 the livestreaming e-commerce that Kuaishou and Douyin offer is a supplement to e-commerce offerings, not a replacement of the mainstream e-commerce platforms. Livestreaming e-commerce tends to satisfy impulsive purchases instead of planned or urgent purchases. The return and refund ratio of livestreaming is high, which we think is inherent in its impulse purchase nature; this makes it difficult for brands to rely on this channel solely 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 has the capacity to 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 noncore investments, which will further boost its financial strength.

Read more about Alibaba Group Holding’s financial strength.

Risk and Uncertainty

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

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

BABA Bulls Say

• Alibaba should be able to maintain or increase its GMV share in China’s e-commerce space, demonstrating its ability to execute its turnaround strategy.
• Alibaba should successfully increase 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 should deliver better-than-expected adjusted EBITA margins despite competition and reinvestment.

BABA Bears Say

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

This article was compiled by Frank Lee.