Alibaba: Notes From The Investor Day

| About: Alibaba Group (BABA)
This article is now exclusive for PRO subscribers.

Summary

BABA’s investor day presentation underscores my bullish view on the stock.

Globalization, rural penetration, ecosystem expansion will be key themes going forward.

Remain bullish. Stock is attractive at current valuation and I would accumulate on weakness.

The author attended Alibaba's (NYSE:BABA) investor day to get a better sense of its corporate strategy going forward. Overall, the trip was largely positive with BABA guiding FY17E revenue growth of +48% y/y (+36% organic) vs. consensus +38% y/y. Long-term revenue growth will be driven by ecosystem expansion in e-commerce, media, payment, O2O and cloud as well as rising monetization of key segments. Additionally, BABA will be focusing on several strategic areas including rural penetration, where I believe BABA's Cainiao logistics places the company at an inherent advantage over its smaller rivals such as JD.com (NASDAQ:JD), globalization by once again leveraging its logistics as well as strategic stakes in foreign companies such a Paytm in India (see - Alibaba: Setting Up The Iron Triangle), and cloud. Overall, I remain bullish on BABA and its medium-term outlook and the company remains my top pick among the global internet players.

The investor day focused on several key areas worth highlighting, namely e-commerce, ecosystem, and medium-term expansion. Recall that my thesis on BABA lies on three pillars: First, I expected BABA to continue to dominate China's e-commerce space. Second, cross-border e-commerce will be a medium-term driver, thanks to BABA's logistics network. Finally, BABA's ecosystem could power long-term growth from integration.

On e-commerce, the company guided solid GMV forecast relative to consensus as core market place growth remains healthy with +50% adjusted EBITDA margin. Taobao continues to see increasing traction among the users with engagement expected to hit 41% vs. 36% last year. More important, Taobao mobile DAU has reached 150m with 1b in monthly listing. Rising engagement and listings have resulted in higher spend per marketer and this is accretive to my near to medium-term outlook on the company.

Relative to Amazon (NASDAQ:AMZN), BABA is more than e-commerce where the company is leveraging its cloud asset to gather consumer data and provide critical intel for advertisers. Cloud revenue is expected to grow in the triple digit as China's cloud market continues to expand. AliCloud is the most competitive cloud provider in China with a full suite of product offering and this is could continue to attract clients, resulting in higher revenue growth.

Rural expansion will be another driver for BABA given the potential in the 700m+ rural population that is expected to drive Rmb1trn e-commerce transaction in the next five years. BABA is looking to build service centers in 600 counties and 40k villages by the next two years, more than doubling the current level. I believe that BABA's investment in the last-mile logistics will pay off as mobile e-commerce increases in the rural area given that many do not have a desktop and instead rely on mobile for purchases.

Finally, BABA's ecosystem integration will be crucial for the company's long-term growth. The company is already a competitive player in the fast growing online video market with the acquisition of Youku-Tudou, dominance in e-commerce, exposure in mobile browser and payment. Integrating the asset under one seamless platform is a logical move to ensure the sustainability of its ecosystem in my view. Ant Financial and Alipay will be important drivers of such initiative, but worth noting that Alipay is seeing growing competition from Tencent's (OTCPK:TCEHY) WeChat Payment and could lose the payment battle if it does not create a competitive ecosystem.

Conclusion, investors day was mostly positive and it appears that the near-term growth outlook for BABA is sustainable. Remain bullish on the stock.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.