Financial Analysis report: Alibaba Group
Author: Rohinish Gupta | Editor: Shayna Leng | Updated November 15th 2020
Alibaba Group Holding Limited, commonly known as Alibaba Group, is a diversified Chinese multinational conglomerate based in Hangzhou. Founded in 1999, it operates in the fields of e-commerce, cloud computing, digital media, and financial services. It has a market capitalization of 700 billion USD and hosts over 960 million active users.
Alibaba is consistently growing at a competitively fast rate through its four segments:
Commerce (retail and wholesale commerce in China (online shopping?), logistics services, consumer services).
Cloud Computing (offers cloud services to customers worldwide, through database, storage, network virtualization, security, etc.).
Digital Media & Entertainment (film, video-sharing platforms, events, news, literature, music platforms).
Innovative businesses (Amap/AutoNavi, ANT Financial, etc.)
Commerce accounts for 86% of its total revenue, whilst the other three segments account for the remaining 14%.
Alibaba’s operations and growth prospects remain incredibly strong due to the high level of engagement it offers its nearly 1 billion customers, its value to retailers and businesses, how it empowers individuals through technology, alongside strategic investments, and acquisitions in the field of technology like Ant (Alipay). So long as digital technology continues to empower and help individuals and small businesses socio-economically (via increased reach, connectivity, and accessibility), Alibaba’s sustainable growth model is likely to be achieved.
What is special about Alibaba:
What separates Alibaba from other e-commerce companies is that it has no inventory, and therefore does not store goods or require as much logistics. Hence, it enjoys a higher profit margin, and far lower debt to equity as opposed to other businesses in the same field. E-commerce is the main moneymaker for Alibaba; however, it is diversifying rapidly into new and innovative businesses. Its growing and innovative cloud service is efficient, cost-effective and has high usage from both paid and non-paid customers. Eventually, it is posed to be a huge revenue generator in Chinese and global markets.
Chinese media and entertainment is a rapidly growing industry and is expected to become the world’s largest by 2023. Alibaba’s entertainment companies hold 50%+ of the market share, whilst hosting 290 million+ active users.
Alibaba’s active monthly users are increasing by each quarter, as more and more individuals are being empowered by technology. This not only boosts online activity to Alibaba’s platforms; it boosts its profits and revenue through monetization.
Not to mention, the diversification of Alibaba into financial services through its subsidiary, Ant, is a gamechanger for the company and the financial services industry. Ant, formerly Alipay, is the largest fintech company in the world. It processes payments between users, whether shoppers, businesses, street vendors, or friends. It has over 700m active users and as of 2017 completed $8trillion in financial transactions. In combination with Alibaba’s other businesses, it creates an ecosystem for finance in China, through insurance, credits, loans, wealth management, etc. The algorithm of the platform does not discriminate based on literacy gaps, instead, everyone communicates through the common language of money. Its market potential makes Ant one of the world’s most revolutionizing platforms. Ant’s IPO, which may be in the near future, is estimated to be $313b. As of October 30th, it has attracted $3 trillion in retail-investor bids.
Potential competition and concerns:
Alibaba does have some competitors in the realm of e-commerce, most notably JD.com, which occupies half of its market share at 24.7%. I do not see this as a long-term threat, as JD.com is not connecting and revolutionizing the consumer market of China (which Alibaba is doing) and poses weaker financials and credibility. Amazon’s presence, initially as a concern, is diminishing as it only holds 0.8% of the market share in China.
However, the potential globalization of Alibaba’s businesses (if they focused more on international markets) could be troubled due to US-China trade issues and regulations. Many other nations, like India, seem to be following the US’s steps to ensure privacy and security for their citizens. However, due to Alibaba’s credibility and track record (and the fact that we are being more globalized day by day) – I do not see this being an issue.
Furthermore, the P/E ratio (an alternative way to value companies through dividing their share price over their earnings per share) of Amazon is 123.30 and JD at 70.73, whereas Alibaba’s is only 39.53. This indicates to us that Alibaba is more valuable and will see accelerated growth in the future compared to its competitors in the Chinese market.
Alibaba’s strong financials are accredited to its expansion into new industries and its rapid growth as a company. In Q1 2016, its revenue was $15.67b and its gross profit was $10.34b. As of Q1 2020, its revenue has grown by over 450% to $71.9b and its gross profit is $32b. In that same period, their net income grew from $11b to $21b.
In reference to the respective dates, Alibaba’s grown their total cash & ST investments from $17.9b to $51b. Its total assets are $185b and their liabilities are at $62b. It is fair to say that Alibaba poses as a company with strong and continuous financial growth, as well as future growth as they have an excess of cash.
Alibaba continues to reward its shareholders and impress market analysts and economists by beating estimates; a $0.59 per share earnings estimate radically lower than its reported $9.20 EPS. Compared to Q1 last year, its revenue is up 22.3% and has a price-to-earnings ratio of a solid 32.6.
Currently, Alibaba’s intrinsic value is at $124 (1-year period), a 52% decrease from the current price of $259. However, as we know from successful companies like Amazon, Apple and Tesla, the intrinsic value does not necessarily correspond with the market value (and the value investors give it). CNN Analysts value it at over $2344, and its strong financials and business plans justify that. Compared to its competitors, its P/E ratio deems Alibaba to be 2x more valuable than JD.com and 4x more valuable than Amazon. Once ANT conducts its IPO, I believe the momentum will increase rapidly for BABA. Based on its chart readings, the current price is above the moving average, and therefore it is a good time to enter.
Alibaba’s unfair advantage:
In Asia’s rapidly accelerating socio-economic climate, the nation of China is the economic and technological powerhouse of the continent. The government, being authoritarian capitalist, converts its prioritized interests to successes efficiently.
Companies like Google, Facebook and Twitter were essentially banned by the Chinese government. This left a huge market gap, which Alibaba backed by the Chinese government filled. Alibaba owns a 75% stake in the ‘YouTube of China’, Youku, and a huge stake in the so called ‘Twitter of China’, Weibo.
The company’s relationship with the government stems back to the Chinese government’s use of Taobao and Tmall to incur billions of dollars of financial transactions. In fact, today most Chinese government entities do business with other Chinese entities using Alibaba’s platforms.
Alibaba, a Chinese company, fills in market gaps administered by the Chinese government, and in turn creates jobs and promotes socio-economic growth in China. It is essentially guaranteed to be successful since the Chinese government protects it from competitors and has a vested, long-term interest in the company.
A final note:
BABA is a stock that shows strong promise for long term growth & returns. Its innovative core commerce business is still the primary revenue-generator and is constantly growing and expanding. However, the diversification into other industries like cloud-computing, entertainment, and financial services, is what is creating an Alibaba ecosystem in China and the world. Although its intrinsic value is lower than its market price; that simply does not mean much in Alibaba’s case. It is heavily justified by its growth, and potential in Chinese & international markets.
Its protection from competitors by the Chinese government guarantees it to be successful. The nearby IPO of Ant, Alibaba’s strong financials, profit-margins, its billion-person reach, and constant innovation and revolutionization of industries is what poses Alibaba Group as a growth-promising investment.
The narrative of major investments is now international, instead of just focusing on US & European markets. Internationally, the only notable company that has a strong track record, progressive financials and is dynamically changing the fields it enters is Alibaba Group. This in-turn will attract investors and generate a high return for shareholders.
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“Everything Alibaba Does Differently - and Better.” Harvard Business Review, 21 Aug. 2018, hbr.org/2018/09/alibaba-and-the-future-of-business.
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Somaney, Jay. “Chinese Government Has A Huge ‘Stake’ In Alibaba.” Forbes, Forbes Magazine, 18 Oct. 2015, www.forbes.com/sites/jaysomaney/2015/10/18/chinese-government-has-a-huge-stake-in-alibaba/?sh=2a8a97ef25b8.