Alibaba: Attractively Valued Ahead Of The Quarter

| About: Alibaba Group (BABA)


BABA will report on Thursday with consensus expecting Rmb 5.80 in EPS and Rmb 33.18b in revenue.

Expect another quarter of solid GMV growth and improving mobile monetization.

Current valuation of 20x CY16E earnings remains the most attractive of the peer group.

Alibaba (NYSE:BABA) will report on Thursday before market opens. The company will hold a conference call at 7:30 a.m. The stock has been down -13% since the beginning of this year and underperformed the NASDAQ index due to the overall weakness of the market and the concerns over China's macro slowdown. Although the concerns are well founded, it is worth noting that the overall retail spending in China remains strong and that e-commerce continues to be the fastest growing segment in retail spending; a positive for BABA.

Consensus expects Rmb 5.80 in EPS and Rmb 33.18b in revenue, +22% y/y. I expect another quarter of solid GMV growth, partially driven by Single's Day sales (see - Alibaba: Still The Champ), an improving mobile monetization and stable PC monetization. I also expect strength in BABA's cloud segment that is well positioned for the rising demand in cloud services in China.

In my view, the near-term driver of the stock will continue to depend on its execution within China's domestic e-commerce market and its various niche verticals in media, payment and cloud with the medium-term driver being the ramp-up of cross-border e-commerce in Asia and potentially North America. My long-term view on BABA depends on its integration of the Aliyun ecosystem and with the company scaling up on mobile payment, O2O and logistics. BABA remains my top ideas for global e-commerce and I reiterate my bullish view of the stock ahead of the earnings.

On core business, I expect mobile revenue to continue to grow at mid-triple digits on the back of low-triple digit GMV growth. Additionally, investors also can expect a steady uptick in active buyer growth and mobile MAU growth, underpinning BABA's sustained network effect, which lays a good foundation for its future expansion. BABA's investment in O2O and media will continue to strengthen its ecosystem that ultimately drives the growth of its core e-commerce business. In my view, the current stock price appears to be valuing BABA solely on the core business and discounting the potential impact of the strategic investments. The next decade, I would not be surprised to see O2O to be as big as BABA's existing core business, which is why I think the current valuation of 20x CY2016E earnings is very attractive.

On cloud service, the near-term pricing environment appears to be favorable and I think the growing demand for cloud services by enterprise customers, government agencies and SMEs to be supportive of this segment's medium-term growth outlook. Similar to O2O, it appears that investors are not giving BABA enough credit on the potential of the cloud services.

Conclusion, I remain bullish on BABA ahead of results. At 20x CY16E earnings, it remains the cheapest large-cap Chinese stock with perhaps the best growth outlook.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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