We started coverage of Alibaba with a Buy recommendation and a price target of $225 on the stock. We like Alibaba for multiple reasons, however, the main reasons for our interest in this company are as follows:
1. Strong fundamentals. Strong free cash flow position and attractive EBIT margins (which we expect to continue increasing in the foreseeable future);
2. Big Total addressable market (TAM) - Although China is facing a slowdown in growth we continue to remain optimistic about the Group’s future given its big Total addressable market (TAM) in multiple businesses;
3. Leading online commerce ecosystem with a combined 80% market share in the Customer to Customer (C2C) and Business to Customer (B2C) segments – this is a very high margin business for the Group;
4. Cutting-edge technology to continue to drive up marketing revenues, and
5. Synergies across marketplaces leveraging big data analysis and AliCloud infrastructure.
What is AliCloud?
AliCloud is a subsidiary of Alibaba Group, is a cloud computing company. Alibaba Cloud provides cloud computing services to online businesses and Alibaba Group's own e-commerce ecosystem.
Main points from the Q1 2019 results (Financial Year end March)
* Annual active buyers accelerated to 24% y/y (vs. 22%) to 576mln
* Mobile App Users (MAU) increased by 20% y/y (vs. 22%) to 634mln
* China commerce retail revenues up 47.0% y/y
* International commerce revs grew 44.9% y/y
* Cloud services revs grew 93.3% y/y
* Digital media and entertainment revs grew 46.4% y/y
* Innovation initiatives revs increased 64.2% y/y
Guidance for FY2019 (year end March)
* It is expected that revenue growth will be over 60% for fiscal year 2019. Excluding the consolidation of Ele.me and Cainiao Network, it is expected a revenue growth to be over 50% for fiscal year 2019.
* It will continue to invest its operating free cash flow to generate long-term sustainable profit growth.
2018 Investor Day
2018 Investor Day (17-19 Sep) is the key event to determine near-term share price movement as investors seek more clarity on profit growth outlook from management.
Our price target of $225 is based on a P/E multiple of 30x applied to our EPS estimate of US$7.49 for FY20E.
Our target P/E multiple for Alibaba is comparable to that for Tencent (35x) but higher than Baidu (29x) given Alibaba’s dominant position in China retail space, its high profitability, and solid growth prospects.
Risks to our valuation
* A weak retail consumption growth outlook
* Large Chinese internet companies such as Tencent and Baidu could pose a threat to Alibaba’s Local Services business
* Potential government scrutiny of Internet content and activity in China
Alibaba is well positioned to continue to grow its earning in the years ahead. Its strong fundamental position, its dominant position in the sector as well as its involvement in the cloud business makes this stock an attractive constituent in a well-diversified portfolio.
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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