Two increases to our Alibaba Group Holding Ltd (BABA US) valuation since Softbank Group Corp (9984 JP)’s full year result have driven up our SoftBank fair value estimate to JPY 11,000 from JPY 8,900 per share. We retain our narrow Moat Rating, based on the company’s stake in wide moat Alibaba; its wholly owned ARM Holdings PLC (ARM LN) semiconductor business, to which we also gave a wide moat prior to the takeover; its domestic Telecom Business, to which we would give a Narrow Moat; and its 36% stake in Yahoo Japan Corp (4689 JP), to which we give a narrow moat rating. This is partially offset by SoftBank's 83% stake in no-moat Sprint Corp (S US), its U.S. telecom business. The increased fair value estimate puts the stock on a 4-star rating. With the uncertainty surrounding the Vision Fund and the complexity likely to be added to SoftBank’s accounts via the Fund’s consolidation and the consolidation of the businesses it controls, we suspect a complexity discount may be applied to SoftBank’s share price.
We raised our Alibaba valuation following its March quarter result on May 19 to $130 per share from $112 per share, and then raised it again to $148 per share on June 13 following its 2017 investor event, where it gave fiscal 2018 revenue guidance calling for 45%-49% growth, well ahead of consensus and our prior estimates of 36%. This implies CNY 230 billion-236 billion for fiscal 2018 and suggests accelerating organic revenue year over year, versus last year's 44%-45% growth after adjusting for the Youku and Lazada acquisitions. We see three sources of upside to our previous numbers. The first is better use of data for merchants, particularly "new retail" strategies that aim to give merchants access to personalized mobile marketing and content opportunities. The second is globalization, as third-party merchants are seeing early success reaching Lazada's users in Southeast Asia. The final source is AliCloud, which continues to post impressive paying customer trends and adoption of value-added content delivery and database services.
Analyst: Dan Baker
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