Summary
- SoftBank still offers a way to gain exposure to Alibaba basically for free, but it is a "Buy one, get one free" type of deal.
- We were quite happy with the deal when the investment we had to make was mostly in telecom operations to get the Alibaba exposure for free.
- Now that most SoftBank assets are invested in startups we are not as comfortable with the investment proposition.
- We believe Alibaba has rarely been cheaper, and we are seriously considering buying the shares directly this time.
We were previously invested in $Softbank Group Corp(SFTBY)$(OTCPK:SFTBY), mostly as a way to get free $Alibaba(BABA)$($Alibaba(09988)$) exposure. Not free as in the air that we breath, but more like a "buy one, get onefree" promotion. Basically, SoftBank shares are trading at about half of their sum of the parts valuation, so at current prices when you buy SoftBank shares you are basically getting the Alibaba investment for free. The problem is, you have to like the rest of the investments you are getting, and that is where we are no longer that comfortable. SoftBank has been selling some of the more conservative investments, such as $T-Mobile US(TMUS)$ and its namesake mobile operator SoftBank Corp. (OTCPK:SOBKY) to buy into morehigh-risk startupsat what we see as extremely high valuations. To make matters worse, many of the Vision Fund investments, such as $Uber(UBER)$ and $DiDi Global Inc.(DIDI)$ have been performing horribly, and we do not see a turning point in sight.
The SoftBank Discount
SoftBank is not shy about pointing out how undervalued its shares are compared to its net asset value (NAV). Its most recently reported NAV of $151 billion is more than twice its recent market cap of $75 billion, hence the more than 50% discount.
SoftBank Investor Presentation
The slide below shows what makes up the asset part of the NAV. Alibaba used to make about half of the asset value, but a combination of lower Alibaba share prices and some sales by the company have reduced that to ~22%. A lot of the money from reducing the stakes in Alibaba, T-Mobile, and SBKK (the SoftBank mobile operator), has been reinvested in the Vision Funds. That is why we are no longer interested in investing in SoftBank to get "free" Alibaba exposure, since we are not confident that the money is being invested wisely in this group of "unicorn" companies.
SoftBank Investor Presentation
There is also ARM, which we believe is a good company but which has a stretched valuation. It was acquired in 2016 for $32 billion and it is being talked in the media that it might IPO for ~$50 billion. We think even the $32 billion is too much for a company that is only making ~$1 billion in EBITDA per year.
SoftBank Investor Presentation
So why were we comfortable when the assets outside of Alibaba were mostly mobile phone operators, but aren't now that the assets are concentrated in startups? We have nothing against startups, and we actually like many of the companies the Visions Funds are invested in. But there are also several we dislike, and many of those have become a large part of the portfolio. For example $DoorDash, Inc.(DASH)$, which we view as overvalued and having difficulty achieving profitability, as we analyzed in arecent article. Then there are the ones that have been complete disasters, such asBrandless,Zumethe pizza-making robotics company, andGreensill's financial implosion. Not to mention the high concentration in ride-sharing/food delivery, with huge stakes in Uber, $Grab Holdings(GRAB)$ and DiDi. These are only some of the issues we see with the Vision Fund, on top of the high valuations assigned to many of these startups, which led us to no longer want to be invested in SoftBank, even considering the free Alibaba exposure.
SoftBank Investor Presentation
Alibaba At Current Prices
That being said, is Alibaba a 'Buy' at current prices? We think so, and we are seriously considering buying shares (this time directly, and not by buying SoftBank). The valuation as we'll see is ridiculously cheap, but there are several well-known issues already discussed by many contributors here, including the VIE structure and the de-listing risk. While these risks are real and should be seriously considered when making an investment, there have been some positive signs.
So how cheap is Alibaba? Well, its forward EV/EBITDA ratio is in the single digits at ~8x, which is extremely low for such a technology stalwart. Its trailing twelve months ratio is at ~12.6x, which is about half its ten-year average.
Data by YCharts
Similarly, the P/E ratio is very low, with the forward price/earnings at only ~11x. These multiples are not usually seen in technology growth companies.
Data by YCharts
Analysts expect earnings to continue increasing, even if the growth they are forecasting is relatively moderate. In any case, based on their estimates Alibaba is trading at only ~9x FY2024 earnings estimates, and this is a company that has almost a quarter of its market cap in cash and is buying back shares aggressively.
DCF Model
We built a simple discounted cash flow model to estimate a fair price for the company, using analysts' estimates for the next three years, and 11% growth thereafter. We discounted earnings at a 10% rate, and assigned a 5% terminal growth rate. With these assumptions we get a net present value of $208 USD for the Alibaba ADRs.
Conclusion
SoftBank still offers a way to gain exposure to Alibaba basically for free, but it is a "Buy one, get one free" type of deal. We were quite happy with the deal when the investment we had to make was mostly in telecom operations to get the Alibaba exposure, but now that the investment is mostly startups at what can be argued are inflated valuations, we are no longer interested. That said, we believe Alibaba has rarely been cheaper, and we are seriously considering buying shares, directly this time.
source: seekingalpha
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