Alibaba: A Wonderful Opportunity For Investors With Risk Tolerance

seekingalpha01-24

A reverse DCF analysis indicates that the current stock price reflects revenue growth of -2%, which is overly pessimistic.My calculation of the intrinsic value of BABA is $348 billion, equivalent to $...

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Kk Trader
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Everyone is fearful and capitulated. However, I believe the current stock price reflects an overly pessimistic expectation that is not justifiable.Overview of AlibabaAs per the latest earning report, BABA's main revenue streams come from Taobao and Tmall Group (43.4%), Alibaba International Digital Commerce Group, AIDC for short (10.9%), and Cloud (12.3%). News surrounding each segment intensifies the fear about the future of BABA.The rise of Temu, a subsidiary of PDD Holdings (PDD), equipped with lower prices and free shipping, evokes fears about AIDC's competitiveness in cross-border e-commerce.The U.S. export restrictions on semiconductors, leading to the cancellation of the spin-off and IPO of BABA's cloud segment, cast doubt over the value of the cloud business in China. Moreover, the leadership change in the cloud segment raises questions about occurrences that investors may not have captured.Measuring temperatureThe trend of BABA's stock seems to be telling that BABA is getting into a death spiral. Before analyzing BABA's fundamentals, let's measure the temperature of the current stock price. To identify the expectation embedded in the current stock price, I conducted a reverse DCF analysis.Among the variables required for DCF analysis, negative news such as China's GDP slowdown and intense competition evokes questions about BABA's revenue growth. Thus, I assigned fixed figures to other variables to estimate the expectation of revenue growth rate in the stock's current price.The past trend indicates that the operating margin is downward, and the TTM operating margin is 14.6%. I assigned 10% for this simulation, which is lower than the historical low.BABA's filing, the AuthorI assigned a 25% tax rate based on the Chinese corporate tax rate, a sales-to-capital ratio of 3, considering the historical reinvestment rate, and a cost of capital of 10% considering the U.S. 10-year treasury bond yield and equity risk premium.For the terminal value variables, I applied a 10% ROIC, equal to the cost of capital, meaning that the growth rate for the terminal value neither creates nor deteriorates the company's value.As per the latest earning report, BABA has $78.7 billion in cash and cash equivalents, $31 billion in interest-bearing debt, and $63 billion in non-operating assets. I applied a 30% discount on the non-operating assets because most of the assets are related to 'Chinese' companies.Given my assumptions above, the reverse DCF analysis indicates that the expected revenue growth rate in the current stock price (around $70) is negative 2%. This expectation is too bad to be true.(in millions, except value per share)TTM12345TVRevenue$125$123$120$118$116$113Revenue growth-2%-2%-2%-2%-2%4%Operating income$18$12$12$12$12$11OP margin10%10%10%10%10%10%After-tax income$9$9$9$9$8$9Reinvestment$1$1$1$1$1FCFF$8$8$8$8$8PV_FCFF$8$7$6$5$5$55PV Total$85- Interest-bearing debt-$31+ Cash and Cash equivalent$79Non-operating asset$44Intrinsic Value$177Value per share$70Alibaba's FundamentalRevenueTaobao and Tmall GroupTaobao and Tmall Group are the most prominent pillars supporting BABA. The slowdown in the Chinese economy substantially affected the growth rate of this segment. In addition, the challenge of new competitors such as PDD Holdings and Douyin erodes BABA's market share. The chart below, which represents the customer management revenue, a proxy for Taobao and Tmall Group's revenue, demonstrates BABA's struggles.BABA's filing, the authorHowever, BABA still maintains a 50% market share, which is larger than Amazon's share in the U.S. Since this market leadership creates a strong network effect, I do not think that BABA will lose its competitive edge in the Chinese e-commerce market in the near future.Accordingly, my conservative assumption is that the revenue of Taobao and Tmall Group will grow at the rate of Chinese GDP growth, which is around 4%.Alibaba International Digital Commerce Group & CainiaoThe biggest concern related to the AIDC, especially Aliexpress, could be the rise of PDD Holdings' Temu. With ultra-low prices and aggressive promotions, Temu was ranked as the most downloaded free app in the U.S. for 2023. In addition, Temu is aggressively expanding its territory to over 40 counties. According to Similarweb, Temu's monthly global visits in December 2023 almost matched Aliexpress's visits.SimilarwebNevertheless, I believe that AIDC will continue to be one of the top competitive players in the cross-border e-commerce industry because Aliexpress also offers competitive prices and faster delivery in some counties by introducing a 5-day delivery service with the synergy with Caioniao. The recent growth rate trend of AIDC supports my belief.BABA's filing, the authorSeveral reports(1,2,3) estimate that the global cross-border e-commerce market will grow around a CAGR of 26%. Considering BABA's competitive position, my conservative outlook is that AIDC's revenue will also grow at a similar pace, around 25%.Similarly, I conservatively estimate that the revenue of Cainiao will grow in tandem with the growth of AIDC as Cainiao and AIDC expand their business hand in hand.CloudAs BABA's management mentioned in their remarks regarding the withdrawal of the IPO of the cloud division, the future of BABA's cloud division remains uncertain. Even if BABA maintains a leading position in the Chinese cloud market, challenges such as sluggish market growth and sanctions on semiconductors, especially AI chips, by the U.S. are damaging BABA's ambitions in the AI business.Nevertheless, even if BABA struggles to expand its cloud business, it is unlikely that BABA will lose its market share because customers have to face switching costs if they want to change to other service providers.Therefore, I conservatively project that the revenue of the Cloud division will grow at the rate of Chinese GDP growth, which is around 4%.Consolidation of Revenue ProjectionBased on the above projections and assuming that other segments will grow at the rate of Chinese GDP, BABA's revenue will grow at a CAGR of 10% for the next five years. Then, I assume that the growth rate will gradually decrease to the economic growth rate.DivisionGrowth rateCurrent portion12345Taobao and Tmall4%43.445.146.948.850.852.8AIDC25%10.913.617.021.326.633.3Cainiao25%10.212.815.919.924.931.1Cloud4%12.312.813.313.814.415.0Others4%23.224.125.126.127.128.2Total100108.4118.3130.0143.8160.4Annual growth8.4%9.1%9.9%10.7%11.5%CAGR10%Operating marginBABA's operating margin shrank during the pandemic due to decelerated revenue growth. However, the recent trend indicates a potential recovery in operating margin. I expect that BABA will be able to achieve a 17% operating margin in 5 years, driven by a gradual revenue increase and the monetization of AIDC.Other variablesRegarding other variables such as tax rate, reinvestment rate, cost of capital, and ROIC for terminal value, I applied the same assumptions that I used for measuring the temperature in the current stock price.Intrinsic ValuationBased on my estimation, the intrinsic value of BABA is $348 billion, equivalent to $137 per share.(in millions, except value per share)TTM12345678910TVRevenue$125$138$152$167$183$202$220$235$248$259$269Revenue growth10%10%10%10%10%9%7%6%5%4%4%Operating Income$18$21$24$27$30$34$37$40$42$44$46OP margin14.7%15.1%15.6%16.1%16.5%17.0%17.0%17.0%17.0%17.0%17.0%After-tax income$16$18$20$23$26$28$30$32$33$34$36Reinvestment$4$5$5$6$6$6$5$4$4$3FCFF$11$13$15$17$20$22$25$27$29$31PV_FCFF$10$11$11$12$12$12$13$13$12$12$137PV Total$256- Interest-bearing debt-$31+ Cash and Cash equivalent$79Non-operating asset$44Intrinsic Value$348Value per share$137RiskFirstly, my projection for the revenue growth of Taobao and Tmall is based on the assumption that the Chinese consumer sentiment will become positive. However, my scenario may not materialize because the decline in the prices of Chinese assets, such as housing and stock, could incur a more severe reverse wealth effect.Secondly, BABA may not be agile enough to respond to Temu's aggressive expansion into international business due to BABA's relatively larger size. And it may be too bureaucratic to change, as we can discern from Jack Ma's internal memo. In this case, my projection of AIDC's growth rate may not be achieved.ConclusionIt is human nature to extrapolate the future from the recent trends. While the stock price of BABA has been continuously falling, the expectation embedded in the current stock price is too excessive to be justified.In my view, BABA is worth around $137 in a conservative scenario. For those who believe that the stock market is a weighing machine in the long run and have the stomach to hold shares of Chinese stock, it could be a wonderful opportunity to seize a bargain.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":266500642603096,"gmtCreate":1706099279094,"gmtModify":1706099283640,"author":{"id":"4102905095723380","authorId":"4102905095723380","name":"Kk Trader","avatar":"https://static.tigerbbs.com/9641be057b54956245f679d3f78bb396","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4102905095723380","authorIdStr":"4102905095723380"},"htmlText":"Lol","listText":"Lol","text":"Lol","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/266500642603096","repostId":2405498188,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":17,"commentSize":1,"repostSize":1,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}