Morgan Stanley: Alibaba Investors Should Reinterpret Jack Ma's New Speech

In a report published Monday, Morgan Stanley analysts maintained an Overweight rating on Alibaba Group Holding Ltd BABA, following the latest speech by the company's chairman, Jack Ma, made during an annual event in Beijing. In the report Morgan Stanley noted, "In the speech, Jack Ma guided for a headcount freeze in 2015 for Alibaba, which grabbed the headline. Most interpreted the message as a hint of potential earnings pressure in the near term, with the need to control costs after rapid growth." The analysts believe, however, that Ma's speech was "lost in translation" by the media. For the most part, we think the speech was meant to rally and show commitment to the new members of the group (as well as old members) that are located outside of the Hangzhou HQ. Alibaba's six other categories are known, namely 1) eCommerce, 2) Ants Financials, 3) ChinaSmart Logistics, 4) Big Data & Cloud Services, 5) Advertising Services; and 6) Cross Border. However, the "Seventh Category" may be "the future of Alibaba," the analysts said. By 2019, Alibaba could move beyond core eCommerce and into "Other InternetServices." Ma meant to repeat his "long-held belief" that, while the company needs employees to be innovative and resourceful, headcount "is not the way to grow GMV." Ma targets "Alibaba to achieve Rmb10 trillion GMV with no more than 50k employees." Ma believes that greater innovation and better productivity "are the only ways for its domestic China operation to achieve this ambitious goal," the analysts wrote. Alibaba creates a "vibrant ecosystem" for its partners to do business. Ma believes that adding more Alibaba employees would mean "less businesses for its ecosystem partners," the report mentioned. Ma warned that the restructuring or optimization of various business units this year could exert pressure on the company's near-term performance. "While the Street may read this as a negative that signals muted earnings catalysts in the coming quarters, we agree with the company that such restructuring would be necessary for Alibaba to become adaptive to a rapidly changing competitive landscape," the analysts added. Morgan Stanley estimates non-GAAP net profit for F4Q15 at Rmb3,520mn, down 47 percent y/y/. Non-GAAP net margin is expected to drop to 21 percent, versus 55 percent in F4Q14. The net margin is expected to recover to 43.6 percent in FY16.