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Alibaba CEO change not detrimental, says Morningstar

R.J. Hottovy, CFA  |  13 Sep 2018Text size  Decrease  Increase  |  
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Alibaba co-founder and chairman Jack Ma has announced he is retiring next year and will be succeeded by current chief executive Daniel Zhang

Alibaba co-founder and chairman Jack Ma has announced he is retiring next year and will be succeeded by current chief executive Daniel Zhang.

Ma's decision to step away from wide-moat Alibaba's executive chairman role in 2019 and the company's board of directors will not impact our positive long-term bias for two reasons.

First, we believe recent results demonstrate that Alibaba has a deep management bench, including current CEO Daniel Zhang, who will transition into the chairman role in 2019 and played a central role in the development of the Singles Day shopping event, building the Tmall platform from a regional to global business to consumer platform, and deploying several of Alibaba's "New Retail" strategies.

Second, we believe Ma's involvement with the Alibaba Partnership, a 36-member group of core company managers, will allow him to stay involved with certain strategic decisions.

We remain comfortable with our US$240 fair value estimate and believe Alibaba is one of the more undervalued investment stories in the consumer category. We believe that negative trade war headlines have been masking steps to increase engagement among its existing user base and incubate new potential avenues of growth.

Our fair value estimate assumes a revenue compound annual growth rate of almost 37 per cent for fiscal 2019-23, including 61 per cent growth in fiscal 2019, consistent with management's 2019 revenue growth target of 60 per cent, or 50 per cent excluding acquisitions.

We expect adjusted earnings before tax margins to contract to the high-20s the next few years, versus 42 per cent in fiscal 2018, due to technology, logistics, product development, and marketing investments as well as the impact of acquired businesses.

However, we expect margins to inflect as investments wind down and nascent businesses scale, bringing our fiscal 2028 adjusted earnings before tax margins back to the low- to mid-30s.

Despite our confidence in management's ability to execute following upcoming management changes, we will maintain our Poor equity stewardship rating due to questions about partnership voting rights, variable interest entity (VIE) structure, and convoluted ownership structure.

What is Alibaba?

Alibaba is the world’s largest online and mobile commerce company, measured by gross merchandise volume. It operates China’s most-visited online marketplaces, including Taobao; consumer-to-consumer, and Tmall; business-to-consumer.

Alibaba's China marketplaces accounted for 73 per cent of revenue in fiscal 2018, with Taobao generating revenue through advertising and other merchant data services and Tmall deriving revenue from commissions.

Additional revenue sources include digital media and entertainment platforms, international retail marketplaces, cloud computing, logistics services and innovation initiatives. 

 

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R.J. Hottovy, CFA, is a consumer strategist for Morningstar. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

©2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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