Why Alibaba's Stock Is Attractive
Despite increased competition, Morningstar's analyst thinks China's e-commerce giant has new growth opportunities to tap.
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 personalized 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 monetization 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 globalization 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 globalization, third-party merchants are successfully reaching Alibaba’s Lazada users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. While early, we share management’s views about Ele.me offering incremental monetization opportunities from Alibaba’s user base.
Chelsey Tam does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.