Company and Stock Overview
Alibaba group holdings (NYSE: BABA) or better known simply as Alibaba is a multinational technology company, that operates in the e-commerce, retail, internet, and technology space. The street’s recent fear of rising interest rates coupled with the negative market sentiment around Chinese companies as a result of regulation fears has led the stock to fall 27% off of highs in October of $309.92 to $226.39 at the time of writing. With a market value of $613.5 billion the company comes in as the second-largest player in the e-commerce space behind Amazon, however, it also operates in different business verticals including logistics and cloud computing.
E-Commerce and Cloud Industry Growth
The global e-commerce market is currently valued at USD $9.09 trillion and is expected to grow at a CAGR of 14.7% from 2020 to 2027 as per grand view research. Alibaba continues to be a dominant player in the fast-growing e-commerce space and makes up about 53.3% of all online retail sales in China in 2020, according to eMarketer. Additionally, looking at the companies 2021 interim report, it can be seen that 86% of their revenue has come from their core commerce segment which includes their large retail and e-commerce platforms. Looking further it can be seen that Alibaba’s cloud infrastructure is also a growing revenue driver, accounting for 9% of total revenue – a 60% YOY change! Alibaba’s participation in the cloud space is a segment of its business that is being heavily overlooked, in fact, it has finally turned profitable for the company and makes up 6% of the total $129 billion dollar cloud market that is expected to grow at a CAGR 18% (2020-2027).
Financials and Valuation
In addition to being a strong market player in the e-commerce space and emerging quickly in the growing cloud industry, Alibaba presents strong financials and its DCF and PE ratios suggest it is heavily undervalued. In the past decade, the company’s top line has grown 100-fold from CNY $6,417 million to CNY $644,208 million, with its free cash flow increasing 81 times to CNY $164,381 million. Currently, the company’s operating cash flow is sufficient enough to cover its USD $18 billion in debt. Projecting out the company’s cash flows and using a 10% discount rate we can arrive at a fair value of $335.98, indicating a 48.8% upside. Additionally, when evaluating Alibaba’s forward P/E ratio to the comparable set (Tencent, JD.com, Baidu, Amazon) we can see that it is relatively lower than its competitors and attractive when we consider it is a tech company in a fast-growing industry. Moreover, it has a forward revenue growth higher than all of its competitors at 31% and its PEG ratio below 1 of 0.85 suggests once again that it is undervalued. Conclusively, I believe Alibaba provides great foreign exposure assuming investors are tolerant to short-term risks and fluctuations as a result of current negative Chinese market sentiment, however in the long run Alibaba clearly offers growth at a discounted price.