Alibaba is a tech/e-commerce company founded by Chinese entrepreneur Jack Ma.
While Alibaba's original business is the B2B wholesale platform Alibaba.com, it has since grown into a tech conglomerate of numerous businesses across several industries and countries.
While Alibaba's numbers don't look astonishing on the surface (GAAP P/E = 54x, Non-GAAP P/E = 13x) its potential lies in its many (still unprofitable) growth ventures which have the advantage of leveraging Alibaba's existing base of almost a billion users.
Of course, investing in "potential" is inherently risky, but free cash flow is robust and the company is comfortably established and profitable, with several "non-core" ventures now getting close to profitability.
It helps to understand all the moving parts of Alibaba, so let's look at its businesses and where its profit is coming from. Alibaba currently owns the following:
Chinese E Commerce
Taobao is an online marketplace primarily for small biz and individuals (think eBay/Amazon hybrid). The site is entrenched in Chinese culture similar to Amazon's share of mind in the US.
TMALL is an ecommerce mall primarily for brands. You will find most large brands like Gucci and Nike with stores on TMALL.
Between these two sites Alibaba generates practically all of their operating profit.
Idle Fish is a platform focused on trading second hand goods (think Trademe).
FresHippo is a new hybrid online/offline supermarket chain, which is somewhat similar to Amazon's self-serve supermarket idea.
Sun Art is a brick and mortar supermarket chain listed in Hong Kong in which Alibaba owns a majority stake.
1688 is Alibaba's domestic wholesale marketplace (like Alibaba.com but for China's domestic market only).
International Commerce
Aliexpress is a place for Chinese manufacturers/retailers to sell to worldwide buyers.
Lazada is an ecommerce marketplace (like Amazon) for Southeast Asia. Trendyol is a similar platform for Turkey. Daraz is a similar platform for Pakistan/Bangladesh.
TMALL Global is an e-commerce site for overseas brands to export products into China (as opposed to TMALL Classic where all the stores/brands have a base in China). Kaola Global is a similar platform to TMALL Global but with a focus on niche boutique brands.
Alibaba.com is a place for Chinese wholesalers to sell to worldwide buyers, and is Alibaba's original business.
Chinese Local Services
Koubei is a directory of businesses in China designed to help bring merchants online, start selling online and reach more customers (think Yelp).
Fliggy is an online travel agency/platform in China where brands can offer travellers the latest deals on hotels, flights, attractions etc (think Booking.com).
Ele.me is a delivery app where you can get meals delivered, as well as groceries, medicine and other FMCG. It is one of the largest such apps in China (think Doordash but for more than just food).
Amap is a mobile navigation map app (think Google Maps).
Digital Media
Youku is a video streaming platform which was originally a clone of Youtube, but is now focused on licensing shows and producing original content (think Netflix/Hulu).
Alibaba Pictures is a Hong Kong listed film production company in which Alibaba owns 50%.
Damai is a Chinese online ticketing platform
(think Ticketmaster).
Lingxi Games is a mobile game studio and developer of Romance of the Three Kingdoms, China's 4th highest grossing game on iOS.
Alibaba Cloud
Alibaba Cloud is the largest cloud computing infrastructure and service in China and third largest globally (think AWS). It includes hosting, database, storage, computing, security, data analytics, AI and IoT.
DingTalk is a cloud enterprise collaboration platform for sharing workflows/chatting etc (think MS Teams/Slack) for Alibaba Cloud customers.
Cainiao
CAINIAO is a logistics company launched by Alibaba which connects over 3,000 logistics partners and 3 million couriers. The open platform streamlines warehousing, fulfillment, routing and delivery. It handles 100m packages per day and is one of Alibaba's unicorns, valued at up to ~$19b.
Alibaba owns a 63% stake.
Innovation
TMALL Genie is a smart speaker which integrates with other IoT devices by Alibaba (think Amazon Alexa).
DAMO is a technology research academy.
ANT Financial
ANT Financial is a financial services company which owns AliPay, the largest mobile/online payment app globally, and numerous other startup investments in several countries. ANT has previously been valued between $200b and $300b. Alibaba owns a 33% stake.
China commerce (Taobao and TMALL) provides the entirety of the company's profit, while every other division is loss-making.
On the plus-side, that profit comfortably covers the investment/loss required for all other divisions, and still leave a surplus profit of around $15 billion per year.
The other divisions are close to profitability, though. Alibaba Cloud has been EBITA positive for the last seven quarters, and CAINIAO was EBITA positive for the first time in the Sept 22 quarter.
Digital Media (Youku and Alibaba Pictures) has had flat revenue for almost two years and seems the least promising. The other divisions have healthy revenue growth, though none are close to profitability.
Announcement of Alibaba Split Up
Recently Alibaba made the announcement that each of these business units would no longer operate as sub-units of Alibaba - rather, they would each start to operate as individual companies with their own CEO and board of directors, and would have the ability to raise outside funding and even IPO.
The share price shot up 15% on the news, signalling this was positive news for many investors, including me.
I have always found it odd that Alibaba had so many business units that didn't make money. It's essentially TMALL and Taobao funding 20+ different businesses that just lose money every year.
Now that those business units will no longer be run under the same management as TMALL and Taobao, will they be able to flip things around and speed up their path to profitability?
Valuation: Sum Of The Parts
As each business is isolated, I think the most suitable way to value BABA is a "sum of the parts" calculation.
This means: How much they would receive if they sold off each of these individual business units?
As I write this, the market is valuing Alibaba at a market cap of $259b, plus they have $55b in cash, meaning their businesses are valued at $204 billion.
Here are the current revenue and profit/loss figures for each unit TTM (trailing twelve months):
We can see every unit has made a loss over the past twelve months, except for China E Commerce which turned a $24b profit.
For a reasonably mature and profitable business, valuing the business on a P/E ratio is reasonable.
For growing but non-profitable businesses, valuing the business on a P/S (price to sales) ratio is common.
To be very prudent, let's start by valuing the China E-commerce businesses at a P/E of 10x.
For the loss-making businesses, let's just value them all at 1x sales.
Here's what we get:
Also added at the bottom is Alibaba's stake in ANT Financial.
Current estimates by investment banks put ANT's valuation at $64 billion, which would put Alibaba's stake at around $21 billion.
At these multiples, we get a valuation of $302 billion, giving us a margin of safety of 32%, or $98 billion at current prices.
Keep in mind this is a very prudent valuation in my opinion.
If Alibaba tried to sell Taobao and TMALL today, I can almost guarantee they would receive far more than 10x earnings, and would also fetch much more than 1x sales for both Cloud and CaiNaio.
Let's ramp those multiple up a little. What about a P/E of 20x for Ecommerce, and a P/S ratio of 3x for everything else:
At these multiples, we get a valuation of $621 billion, giving us a margin of safety of 67%, or $417 billion at current prices.
Even these multiples look conservative to me.
For example, let's look at some other cloud businesses.
Dropbox - a cloud storage business at a much smaller scale, historically trades around 4x sales.
Snowflake - a cloud data business, currently trades at 24x sales.
Unfortunately there are no "pure" competitors to Alibaba Cloud that are listed - all of them are sub-units of larger companies, such as Microsoft Azure, or Amazon AWS, so there's no way to determine which multiples they trade at on their own. The same holds true for CaiNiao.
I personally would be even more prudent, and wouldn't even give a valuation to the Innovation, Digital Media and Local Services units.
They all don't grow, lose money, and aren't close to profitability.
However, even allocating a value of zero to all three of them, and using our most conservative multiples of P/E 10x and P/S 1x, I still get a valuation of approximately $291 billion:
What's the catch?
Share price has plummeted from a high of $310 to a low of $69 in 2022.
Let's talk about why the shares are so cheap, and if it's something to be worried about.
1. Alibaba's revenue growth has been slowing. It's no longer in the "fast tech" growth phase. This was partly due to the pandemic, and China's very strict lockdowns. Will business bounce back? Maybe.
2. There is tension between the US and China politically and economically. The problem is, Alibaba is listed on the New York stock exchange. The US wants greater access to audit Chinese accounts, and China has been reluctant to comply in full. There are always reports of having positive "talks", but that never means the problem is gone. Delisting is still a real risk.
3. China's government last year levied new "taxes" on Chinese mega caps in order to redistribute wealth, termed "common prosperity", Alibaba has so far committed $15b to common prosperity regime. Alibaba was also recently fined $3 billion by the Chinese govt for breaching "anti-monopoly laws". The Chinese government has also introduced "golden shares" for the government, which is essentially gives the government a special type of ownership in these companies. Is it worth investing in a company the Chinese government has this much control over?
4. Jack Ma has not been involved with Alibaba for some time. If you've read the history of Alibaba, they would be nowhere without Jack Ma. He was literally the quarterback that made all the big plays during their growth story. However, after speaking out about the government and pissing off the wrong people, he was almost de-facto banished from China, and was only allowed back in and speaking in public recently (March 2023). Alibaba has done okay without Jack, but try to imagine how Tesla would be doing with Elon Musk, or Amazon would have done with Bezos, or Facebook would have done without Zuck. It's just not the same without the quarterback.
It's not often you get a mega-cap like Alibaba priced at these levels.
BABA opened at $92 on IPO day in 2014, when it was generating a mere $6b in free cash flow (it generated $15.6b in 2022), and is back down to IPO day price today.
Of course, more related risks may eventuate in the future, especially with relation to the Chinese government and further regulatory changes, so you should be comfortable with this side of the risk profile. The business itself is highly cash generative with several growth outlets at almost-IPO prices, with a substantial margin of safety even at conservative multiples.
Essentially the question is this:
Do you want to buy one of the world's best tech companies, for a large discount, but take on the risk of investing in China?
Not financial advice. Do your own research and consult your own professional advisors. Disclosure: Long BABA.
