Alibaba Group Holdings Ltd (BYSE:BABA)

March 05, 2015 | Price: $85.49

Dominant market share and GMV growth

Overview: Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People’s Republic of China and internationally. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time online advertising exchange in China. The US-listed initial public offering was the largest IPO raising $25bn.

Catalysts: With management focusing on long-term growth profit margins and net cash flow have recently stagnated due to investments and expansion strategies post IPO. Retail Gross merchandise volume (GMV) in the Chinese retail market experienced strong growth and mobile take rates are consistently improving. Whilst less aggressive monetization on PC ads weighs on current performance, all factors combined suggest the company has the potential to transition its strategies in the long-term and maintain its strong market position. The stock has retreated 25% since touching a high in November 2014 which presents us with a buying opportunity.

Hurdles: Whilst management continues to focus on expansions and acquisition, there is no guarantee that the growth strategies will result in value creation. Alibaba operates in a highly competitive industry as marketing costs may disproportionally increase in the hunt for user traffic.

Investment View: Alibaba offers exposure to the Chinese online commerce sector. Whilst current expansion strategies and transition in monetization weighs on the company’s earnings, GMV growth indicates that Alibaba is on track to maintain its strong market position and deliver modest growth. Investors have reduced exposure causing Alibaba to retreat 25% as we initiate coverage with a ‘buy’ recommendation.

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