Nov 03, 2018 07:44:50

While uncertainty about China and global macro conditions continue to weigh on wide-moat Alibaba (US:BABA), second-quarter revenue growth of 54% reinforces the resiliency of the firm's business model, regardless of economic backdrop. Share price appreciation may be difficult until U.S.-China trade tensions subside, but we believe investors should focus on three positives from the quarter.

First, Alibaba has developed a sensible game plan for difficult macro conditions, including the temporary suspension of certain merchant fees on its Taobao platform. While we appreciate investor concerns about this decision--the fee suspension will negatively affect Alibaba's higher-margin core commerce platform--our research has shown that economic downturns have historically offered e-commerce platforms an opportunity to lock in new buyers and sellers, both of which then engage in other higher-margin products and services when economic conditions stabilize. We expect a similar scenario to play out with Alibaba. Second, the Chinese consumer is relatively healthy, backed by wage growth, solid household balance sheets, and access to consumer credit. Third, ancillary businesses like the combined Ele.me/Koubei, New Retail/Hema, and cloud computing have shifted Alibaba away from being a consumer discretionary story and offer exposure to more resilient consumer and business staples.

While Alibaba cut its full-year revenue outlook to CNY 375 billion-383 billion (50%-53% growth year over year versus its initial outlook for 60%) due to fee adjustments, we expect future merchant/user engagement to offset these headwinds, leaving our five-year gross merchandise volume and China retail revenue growth targets of 30% and 38% in place. We plan to cut our fiscal 2019 EBITDA margin forecast to the mid-20s but still see long-term targets in the low to mid-30s as valid. We're not planning changes to our $240 fair value estimate, and we view the shares as attractive for longer-term investors.