Here Are The Key Triggers For Alibaba’s Stock

Alibaba‘s (NYSE:BABA) stock has under-performed this calendar year, on concerns including slowing top-line growth, macroeconomic challenges in the Chinese economy, and the problem of counterfeit products. However, over the past three months, the company’s stock has seen some recovery on better-than-expected results in the third quarter, which were propelled by strong growth on the mobile and Tmall platforms. While our $84.60 price estimate for Alibaba’s stock, is broadly at par with the current market price, we believe there are certain plausible scenarios that could swing it considerably over the coming years. More specifically, we think competition in the Chinese e-commerce market, growth in international reevenues, and variable bottom-line results underlie possible scenarios that could trigger stock price changes for better or worse.

See our complete analysis for Alibaba

More-Than-Expected Decline In Market Share In The Chinese E-Commerce Market (-10%)

A couple of factors are expected to weigh on Alibaba’s dominance in the Chinese e-commerce market over the coming years.  First, Alibaba’s share of the business-to-consumer (B2C) segment in the Chinese e-commerce market is expected to rise from 40% in 2013 to over 60% by 2017. Simultaneously, its share of the consumer-to-consumer (C2C) market could decline from 60% to 40%, according to iResearch. We expect this change in market dynamics to result in a challenging situation for Alibaba, considering its market share is much higher in the C2C segment. Moreover, competition is expected to intensify for Alibaba in the future, owing to dramatic rise of competitors such as JD.com. Moreover players such as Baidu are also making inroads into the growing online-to-offline (O2O) services market in China. As a result, we expect Alibaba’s market share (by GMV) in the Chinese online shopping market to decrease from 73% in 2014 to 61% by 2018.

However, another scenario is plausible, wherein Alibaba’s market share falls more significantly to 53% by 2018. According to estimates using Trefis technology, this alternate scenario will take our price estimate 10% lower to $76.50. We believe this scenario is also likely, because of the following factors:  1) in the coming future, JD.com could emerge as a big threat, owing to its diverse business model, and due to its focus on faster delivery and product authenticity; 2) Alibaba’s marketplaces could see some loss in brand recognition, if it is unable to address the problem of counterfeit goods; and, 3) a rapid rise in competition from other O2O players could also weigh on Alibaba’s demand in the future.

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Faster-Than-Expected International Growth (+10%)

In our valuation model, we estimate Alibaba’s international commerce revenues to rise conservatively from $1 billion in 2014 to over $3 billion by 2022. This is as we expect the global e-commerce giant to flex its muscles more strongly to gain a higher share of the rapidly growing global e-retail market in the future. Solid cash reserves, strong brand reputation, and huge market for Chinese exports are the key factors that will help Alibaba penetrate further in the international markets.

However, a more bullish estimate, wherein Alibaba’s international commerce revenues grow much higher to $8.5 billion by 2022, will lead to a 10% increase in our price estimate to $91. This scenario is plausible as slowing economy in China could nudge Alibaba to expand much faster in the international markets. Given Alibaba’s recent moves in markets including Europe, Brazil, Russia and India, we think this scenario also seems likely. Also, we expect the company to capitalize heavily on strong demand for relatively-cheaper priced Chinese goods in international markets in the coming future.

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Alibaba’s EBITDA Margin Stays Constant Over Our Forecast Horizon (-10%)

We presently forecast Alibaba’s EBITDA margin to rise from 55% in 2014 to 60% by the end of our our forecast period, as we expect it to benefit from operating leverage and economies of scale. Its marketplaces business model, coupled with requirement of lower incremental costs for expansion could lift margins over our forecast period.

However, in the event, Alibaba’s EBITDA margin stays constant over our forecast period, then this scenario will represent 10% decrease in our valuation to $79. Some of the factors that make this scenario plausible include heightened investments in several growth strategies such as cloud services and video business and an increased share of lower-margin international revenues. In addition, rapid rise in competition in the Chinese e-commerce market, could also impact margins due to the need for faster deliveries and value added services.

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