Last week, $Alibaba(BABA)$ reported its earnings for the quarter ended June 2022. For the first time in history, BABA reported flat revenue growth due to the fall in GMV of online physical goods caused by the impacts of Covid-19 resurgence and restrictions that resulted in supply chain and logistics disruptions in April and May. Revenue for its cloud segment also posted an increase of 10% year-on-year (yoy), marking a slowdown in growth due to softening demand from customers in China's Internet Industry. BABA's financial results this quarter were definitely disappointing but how does the future of the company look?
Earnings call
In this section, I will dive deeper into BABA's latest earnings call transcript to look for indications of future operating performance. Given BABA's recent results and the current macroeconomic situation in China, future growth remains a key concern. Daniel Zhang, Group Chairman and CEO, suggested that the company was seeing strong recovery starting from June due to the recovery of supply chains and normalisation of logistics. Key events such as the 6.16 Shopping Festival continue to drive growth and performance in July will be even better than in June. Furthermore, consumer sentiment has yet to fully recover from 2021 levels, contributing to a fall in consumer spending in 2022. The company expects a more gradual recovery on this front as the Chinese economy grapples with Covid-19 disruptions.
Additionally, CFO Toby Xu mentioned that the company is in a strong financial position to drive efficiencies through cost-cutting structure optimisation and high-quality investments. Toby expects these measures to be reflected through higher EBITDA margins in the future. Daniel added that BABA is shifting its focus from customer acquisition to better serve its existing user base of over 1 billion AACs. BABA is developing a brand new 1p model which allows retailers to achieve higher levels of inventory efficiency and to enhance supply chain efficiency and the logistics service experience.
For its cloud segment, BABA also expects growth to continue as digital adoption drives companies to big data and computing power. While macro headwinds remain, IT expenditure as a percentage of total GDP in China lags the US and other developed countries, presenting opportunities for growth. BABA has been proactively investing in industrial digitalisation and positioning itself to seize opportunities in sunrise industries.
A summary of the bullish investment thesis can be found below:
- Revenue growth as the macroeconomic situation in China improves
- Higher EBITDA margins driven by greater operating efficiency
- Higher cloud penetration driven by digital adoption
Valuation
5 Year DCF Model
A 5-Year DCF model was used to calculate BABA's intrinsic value. Firstly, EBITDA was calculated based on analysts' assumptions, assuming a modest growth rate supported by the investment thesis. Assuming a conservative EV/EBITDA multiple of 15.0x and a discount rate of 10.75% using BABA's WACC, the equity value per share of BABA was calculated to be $125.80 which is 35% higher than the price the company's shares are currently trading at. With a 35% upside potential, BABA not only gives investors a high margin of safety but also attractive capital appreciation potential.
Disclaimer: This article is meant solely for informational and educational purposes and does not constitute investment advice. Perform your own due diligence before making any financial decisions.
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