Alibaba Shakes Off Macro Pressures
The Internet giant’s wide-moat businesses mostly shielded it from China’s economic woes, writes Morningstar’s R.J. Hottovy.
Mobile was a key driver behind the better-than-expected results, with mobile GMV and revenue accounting for 62% and 61%, respectively, of total quarterly growth for China GMV and revenue. Mobile take rates (2.39%) are bridging the gap with desktop (2.47%), suggesting that mobile will soon make more meaningful contributions to revenue and profitability. Tmall GMV growth accelerated slightly versus the first quarter (56% versus 55%), suggesting that the company is successfully navigating the industry shift from C2C to B2C while gaining traction with a wider group of business sellers. This lends support to the network effect underpinning our wide moat rating. Cloud revenue (up 128%) was stronger than anticipated; while management hinted at current unprofitability for this segment, we expect this to change as the current cloud investment cycle winds down and it adds new services/products.
After factoring in better-than-expected top-line results and solid expense leverage--adjusted EBITDA margins were down just 20 basis points to 50.3% despite mobile, cloud, omnichannel, and cross border investments--we're planning to raise our fair value estimate to $84 from $76. We're forecasting top-line growth in the mid-20s and adjusted EBITDA margins in the low 50s during the next five years. While shares appear only slightly undervalued, we'd keep this name on investors' radar screens for any undue weakness.
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