Morningstar - Q1 2020 - 55

Big Data Conglomerate
A strong network effect is enabling Alibaba to expand in
several directions.
BEST IDEAS: EQUITY

R.J. Hottovy

Alibaba BABA

This article is adapted from a Morningstar equity research report dated
Dec. 5, 2019.

Stats 12/31/2019

Over the past few years, Alibaba BABA has transitioned from a traditional
e-commerce company to a Big Data-centric conglomerate, with transaction
data from its marketplaces, financial services, and logistics businesses
allowing it to move into cloud computing, media/entertainment, and online-tooffline services. We've long thought that a strong network effect allows
leading e-commerce players to extend into other growth avenues, and nowhere
is that more evident than Alibaba.
Alibaba's Internet services affect the vast majority of Chinese Internet users
in some way, including a 70% penetration rate for the Taobao/Tmall
e-commerce marketplaces. This provides Alibaba with an unparalleled source
of data that it can use to help merchants and other consumer brands
develop personalized mobile marketing and content strategies to expand their
target audiences, increase click-through rates and physical store transactions,
and bolster return on investment. Alibaba's marketplace monetization
rates have generally been on an upward trend despite recent macro
uncertainty, indicating that sellers are increasingly engaging with Alibaba's
marketplaces and payment solutions. Retail revenue per active user
continues to outpace other China rivals, owing in part to an emphasis on
higher-quality merchants.
While we view Taobao/Tmall marketplaces, Cainiao, and Alipay/Ant Financial
as Alibaba's core cash flow drivers, we also believe AliCloud, globalization,
digital entertainment, and Ele.me (food delivery) offer long-term potential.
While AliCloud will remain in investment mode near-term, we believe
accelerating revenue per user trends suggest a migration to value-added
content delivery and database services that can drive segment margins higher
over time. On globalization, third-party merchants are successfully
reaching Lazada's users across Southeast Asia, something that should continue
as the company rolls out incremental personalized mobile marketing
and content opportunities. While early, we share management's views about
Ele.me and digital entertainment being important user acquisition and
engagement tools.
We've assigned Alibaba a wide economic moat rating based on its strong
network effect, where the value of the platform to consumers increases with

Morningstar Rating
QQQ

Sector
t Consumer Cyclicals

Industry
Internet Retail

Price
$212.10

Fair Value Estimate
$240.00

Uncertainty
High

Economic Moat
Wide

Stewardship Rating
Poor

Market Cap
$571.0 Billion

Price/Fair Value 12/31/2019

$300

Fair Value Estimate Per Share

240.0
212.1 200
Month-End Closing Price

100
0

01/2017

01/2018

01/2019

a greater number of sellers, and vice versa. Despite recent macroeconomic
uncertainty, we expect China and Southeast Asia's digital commerce industry
to have an extended runway of growth based on consumer disposable
income and consumption trends, increasing Internet and mobile adoption rates,
and a highly fragmented brick-and-mortar retail industry. This is in contrast
with other network-based industries, which have often reached a more mature
state by the time leading players fully establish a meaningful network effect.
Our fair value estimate remains $240 per ADS following the company's
2019 investor day. Our model incorporates management's full-year fiscal 2020
outlook calling for over CNY 500 billion in revenue (representing 33%
growth year over year) as well as potentially uneven near-term consumer
spending patterns. Our model also considers some adjusted EBITDA margin
compression expectations due to the consolidation of Cainiao and
Ele.me, as well as increased technology, logistics, product development, local
services, and marketing investments the next several years. K
R.J. Hottovy, CFA, is an equity strategist with Morningstar Research Services.

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