- Consensus estimates call for top line growth of 50% this year and 20-30% through 2020.
- Management has recently highlighted 3 areas for core commerce investments to drive growth.
- We view BABA shares as attractive for long term investors. A SOTP analysis suggests per share value of $135.
Consensus estimates call for top line growth of 50% this year and 20-30% through 2020. We highlight some of the core drivers supporting the outlook. Fundamentals appear rock solid. We see further upside ahead for Alibaba (NYSE:BABA) shares.
Management recently highlighted 3 areas for core commerce investments to drive growth: (i) geographic expansion into rural areas with low eCommerce penetration; (ii) category expansion into the online supermarket; and (iii) geographic expansion into Southeast Asia.
Expansion In The Rural Areas
In aggregate, rural areas with low eCommerce population comprise a population of 600 million people. Management sees a large opportunity in this market by building out the company’s distribution capability to more small villages comprising this end market segment. For instance, China’s rural population is spread across 600,000 villages and Alibaba currently only has a physical presence in about 20,000 villages.
The Online Super Market
Management believes the online supermarket business is highly strategic given its high-frequency nature and ability to build relationships with large brands (as well as potential advertisers). BABA’s supermarket business is not profitable now, but Alibaba plans to continue investing here as scale is the key for it to achieve profitability. Logistics costs currently average ~20% of basket size today, with Alibaba noting that this likely needs to be closer to ~10% to reach profitability.
Alibaba wants to invest aggressively in Southeast Asia, in particular through Lazada. Lazada was recently acquired by Alibaba for $1 billion. Lazada gives Alibaba a presence in 6 new Southeast Asian markets. Alibaba plans to advance Lazada’s logistics capabilities in order to ramp growth.
The aforementioned three focus areas for near-term investment are not the end of the story. We are still early in the innings. Other growth drivers include deeper eCommerce expansion globally and the cloud.
Management sees robust long-term opportunity in cross-border eCommerce. From a population standpoint, areas like India, Southeast Asia and certain parts of Europe (such as Russia and Spain) offer even more longer term opportunity. The immediate priority has been to bring imports to China because Alibaba is strong in China and customers have strong demand for high-quality foreign products. The company has made a lot of effort to bring products from overseas to sell them in China.
However, the business is evolving. Beyond BABA seeking new opportunities in Southeast Asia by leveraging Lazada, India will be the next geographic step. Importantly, the focus will begin shifting from bringing foreign products back to China for retailing to helping more Chinese merchants sell overseas through AliExpress. The plans for India and AliExpress are likely to be bolstered by M&A in order to accelerate timelines.
Alibaba believes enterprise adoption of the cloud in China is ~3 years behind the US, where ~10% of enterprise workloads are in the cloud today. Assuming ~20% of China’s estimated ~$200 billion of IT spend moves to the cloud over the next ~3-5 years, the cloud market in China could be a ~$30-$40 billion market with Alibaba well positioned as the clear leader. Management has noted its cloud opportunity outside of China will be uneven, with more opportunity in Southeast Asia, Japan, and parts of the Europe while less so in the US.
We expect Alibaba to continue to deliver exceptional top line growth. Accordingly, we view BABA shares as attractive for long term investors. A SOTP analysis suggests per share value of $135 based on a 23x P/E for core commerce, a 7x P/S for cloud computing services, a 3x P/S for media and entertainment, and $17 billion of equity investments along with $10 billion of net cash.