Alibaba Management Change Will Not Impact Positive Outlook

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

R.J. Hottovy, CFA 11 September, 2018 | 7:29AM
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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 (BABA) 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 $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% for fiscal 2019-23, including 61% growth in fiscal 2019, consistent with management's 2019 revenue growth target of 60%, or 50% excluding acquisitions.

We expect adjusted earnings before tax margins to contract to the high-20s the next few years, versus 42% 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% 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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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Alibaba Group Holding Ltd ADR92.00 USD0.24Rating

About Author

R.J. Hottovy, CFA  is a director of equity analysis with Morningstar.

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