Bulls say

  • Alibaba’s monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021, much higher than Pinduoduo’s CNY 176 and JD’s CNY 461 in 2020.
  • Core annual active users on Alibaba's China retail marketplaces had a retention rate of over 90% for the year ended September 2021.
  • Alibaba’s core commerce adjusted EBITA margin was 26.2%, compared with than JD retail’s 2.3% non-GAAP EBIT margin and Pinduoduo’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.

Bears say

  • Expansion of other e-commerce players could slow Alibaba's growth. Pinduoduo's active buyers in the year ended September 2021 numbered 867 million, higher than Alibaba's 863 million.
  • Expansion into non-physical-goods-marketplace businesses and other regions could lead to lower margins, and the timing of profitability is unknown.
  • Any Internet company with traffic--like Douyin or Tencent--can enter the e-commerce space due to the low barriers. Douyin has gained market share against Alibaba in apparel and beauty.

Morningstar analyst Chelsey Tam says

Alibaba (BABA) is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. We think a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba.

Alibaba’s Internet services had annual active consumers of 953 million as of September 2021, compared with the 1.2 billion online population in September 2021 per Questmobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalised mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment.

Alibaba's marketplace monetisation rates have declined recently due to increased compliance with antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.

While we view the Taobao/Tmall marketplaces as Alibaba's core cash flow drivers, we also believe AliCloud and globalisation offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. With regard to globalisation, third-party merchants are successfully reaching Alibaba’s Lazada users across Southeast Asia, something that should continue as the company rolls out incremental personalised mobile marketing and content opportunities. While early, we share management’s views about Ele.me offering incremental monetisation opportunities from Alibaba’s user base.

Key proprietary Morningstar metrics

  • Fair Value Estimate: US$188
  • Star Rating: 4 Stars
  • Economic Moat Rating: Wide
  • Moat Trend Rating: Negative

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