Undervalued high growth tech company with Strong Moat

Alibaba Group holdings Ltd. Alibaba can be best described as the provider of the technology platform infrastructure that grants value to its consumers. Alibaba operates in an omni channel ecosystem that I see as a digital equivalent of a large shopping mall which consumers can use Alibaba’s ecosystem for shopping, entertainment and media in exchange for their data and on the other hand merchants use this infrastructure to reach consumers in exchange for a percentage of their sales. Nonetheless, Alibaba’s main source of revenue comes from its core commerce retail which they provide the digital infrastructure and marketing platform to merchants, brands and other businesses. Alibaba through its subsidiaries provides the internet services to its costumers ranging from e-commerce to digital payments, fintech, digital media and entertainments, cloud computing, logistics and other innovative initiatives Therefore, Alibaba is a platform infostructure company that provides services and gathers data to leverage to enhance its digital ecosystem and increase value to its multichannel costumer audience Alibaba’s Network Effect The concept behind the network effect is that a company becomes more valuable as the usage increases which is exactly the case for Alibaba. Alibaba’s stated mission is to make it easy to do business everywhere. It is aiming to achieve this through its network effect in its ecosystem. So the concept is that more consumer that use Alibaba’s omni channels ranging from commerce to entertainment, shipping and cloud computing it means that Alibaba’s aims at providing best digital services to consumers and in return they would gather costumer data. This variety of consumer and merchant data will enable Alibaba to give their costumers more targeted valued services while this big data also entails them to enhance their machine learning (A.I) algorithms to further continue on giving superior services to its customers. Chinese Market Opportunity Alibaba has a unique opportunity regarding its TAM (total addressable market) which is increasing due to the following reasons. First, majority of Alibaba’s initiatives are in China which is one of the most interesting consumer markets around the world. China is the world’s second largest economy that has seen a massive undigestible growth as determined by all the economic indicators like GDP, FDI, Poverty rates, employment rates, GNI, industrial production, trades, etc. Also China has the largest middle class market and its GNI per capita has increased 5 tremendously from $1000 in 2000 to more than $10,000 in 2020 which considering its population this is regarded as a massive economic growth and considering that China is a developing country which means its economy is bound to grow furthermore. Other than China’s economic growth which will while inevitably benefit Alibaba, Alibaba has also a great TAM in the growing Chinese digital infrastructure that Alibaba plays an important rule. According to the 2019 ted talk on China’s e-commerce boom, only 50% of Chinas 2 billion population is frequently online and only half of those normally shop online so as the digitalization accelerates there will be more opportunities in Alibaba’s TAM and market share. Therefore as the sectors which Alibaba operates becomes more competitive, its TAM will increase as well due to the pace of technology and this sector wouldn’t be a winner take all zero sum game as the market capacity increases. Alibaba’s ecosystem • Tmall (B2C) e-commerce ,a third-party online and mobile commerce platform for brands and retailers; • Taobao Marketplace (C2C), a mobile commerce destination for costumers (like ebay) • Alibaba Health Internet platforms for pharmaceutical and healthcare products; 6 • Alimama, a monetization platform; 1688.com and Alibaba.com, which are online wholesale marketplaces; • AliExpress, a retail marketplace for international costumers; Lazada, an e-commerce platform in Singapore (B2C) Tmall Global, an import e-commerce platform that strengthens international footprint for Alibaba • Further, it provides cloud computing, database, storage, virtualization network, largescale computing, security, management and application, big data analytics, and Internet of Things and other services for enterprises • payment and escrow services through its payment subsidiary ant group (Alipay) • movies, television series, variety shows, animations, and other video content. Additionally, the company operates Youku, an online video platform like Youtube in US; Alibaba Pictures and other content platforms that provide online videos, films, live events, news feeds, literature, music, and other • Online grocery company freeshippo and other Chinese retailers like Sunart, Kaola, etc • In addition, the company offers pay-for-performance and display marketing services; and Taobao Ad Network and Exchange, a real-time bidding online marketing exchange • Cainiao Network logistic services platform; Ele.me, a delivery and local services platform; Koubei, a restaurant and local services guide platform; Fliggy, an online travel platform • Amap, a mobile digital map, navigation, and real-time traffic information app; DingTalk, a business efficiency app; and Tmall Genie, an AI-powered smart speaker • Lastly they are working on innovative initiatives which they regard to as “new commerce” like their Taobao Live and short video initiatives that they have consolidated e-commerce with social media. For example in Taobao live merchants show their products through live streaming where the costumers can buy instantly with couple of clicks. Alibaba Market dominance § Alibaba controls China’s e-commerce market share by having more than 50% of the market share § Alibaba also leads the global ecommerce market as its GMV reached $1trillion USD , more than double of amazon’s GMV at $500 billion USD § Alibaba cloud computing sector also leads in the China’s market by controlling 40% Market share in the tremendously growing Cloud industry . 7 o Another opportunity is that IT is developing in china compared to America so most companies don’t have the IT developments in place so they are jumping straight to cloud computing . o Alibaba has also been investing heavily in cloud computing as its revenue from this sector has grown 40% Y/Y based on its last quarterly § Alibaba group also owns 30% of Ant group which is a fintech financial company that has over 1 billion users and 80 million merchants Alibaba’s Financials § The financials of this company look solid, the company grew its revenue in every segment in the previous years, the total revenue grew about 40% y/y finishing 2020 and has annual growth rate of 50% so far § The company itself and analysts believe that Alibaba would continue growing 20% annually for the foreseeable future § This incredible CAGR of 20% sounds promising and logical considering this business’s moat and the emerging TAM both Chinese digital platform economy as of until 2020 only 50% of China’s population were online, so there is a huge opportunity as its Total Addressable Market is growing B2C online retail market platforms in China Q4 2020 8 § Alibaba is also investing to grow its business furthermore through R&D and M&A like the recent purchase of Lazada, a promising e-commerce platform in Singapore to enhance Alibaba’s international presence § The important financial ratios favour this company’s valuations compared to the industry: forward P/E= 17.67 , price/sales= 0.81, price/book= 0.62, P/E= 25.49, eps= 8.34, gross profit margin= 41.28%, net profit margin= 19.00% § Risks: this company is undervalued at this moment for a reason which is mainly due to recent regulation disputes between company and Beijing. To summarize, the company has been hit with one time fine over monopolistic practices as China has been more willing to regulate tech sector like other countries o Nonetheless, I believe this company is oversold because though increased regulation would effect company in a negative way but this regulation is for Alibaba’s other competitors like Tencent, Baidu and JD.com as well and regulation won’t kill this company. Therefore I see the upside to be outweighing the risks Alibaba’s DCF I have Projected the future free cash flows of this company for the next 5-years period using 15% CAGR as it’s projected to grow 20% annually but I used 15 to be more conservative. § I have used the terminal growth rate of 10% as the growth rate will eventually slowdown § I have used the discount rate of 12% and it seems a lot considering the treasury bond’s low yield percentage and almost zero interest rates ; however Alibaba’s stock is a risky investment, so I want it to reward me more than the S&P500 index which has annual return rate of 10-11% § Therefore, based on DCF analysis the intrinsic value of this firm is around $700 per shares which tells me that it’s a good investment for me at the $220 price

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FarbodKamali

Jun 15, 2021

-23.92%

Change % Since Posting

210.20

Price When Posted

-50.29

Change Since Posting

BABA

Alibaba Group Holding Ltd - ADR

159.91

-0.14
-0.09%
Current Price

Undervalued high growth tech company with Strong Moat

bullish

Alibaba Group holdings Ltd.

Alibaba can be best described as the provider of the technology platform infrastructure that

grants value to its consumers. Alibaba operates in an omni channel ecosystem that I see as a

digital equivalent of a large shopping mall which consumers can use Alibaba’s ecosystem for

shopping, entertainment and media in exchange for their data and on the other hand

merchants use this infrastructure to reach consumers in exchange for a percentage of their

sales. Nonetheless, Alibaba’s main source of revenue comes from its core commerce retail

which they provide the digital infrastructure and marketing platform to merchants, brands and

other businesses. Alibaba through its subsidiaries provides the internet services to its

costumers ranging from e-commerce to digital payments, fintech, digital media and

entertainments, cloud

computing, logistics and

other innovative initiatives

Therefore, Alibaba is a

platform infostructure

company that provides

services and gathers data

to leverage to enhance its

digital ecosystem and

increase value to its

multichannel costumer

audience

Alibaba’s Network Effect

The concept behind the

network effect is that a

company becomes more valuable as the usage increases which is exactly the case for Alibaba.

Alibaba’s stated mission is to make it easy to do business everywhere. It is aiming to achieve this

through its network effect in its ecosystem. So the concept is that more consumer that use

Alibaba’s omni channels ranging from commerce to entertainment, shipping and cloud

computing it means that Alibaba’s aims at providing best digital services to consumers and in

return they would gather costumer data. This variety of consumer and merchant data will enable

Alibaba to give their costumers more targeted valued services while this big data also entails

them to enhance their machine learning (A.I) algorithms to further continue on giving superior

services to its customers.

Chinese Market Opportunity

Alibaba has a unique opportunity regarding its TAM (total addressable market) which is

increasing due to the following reasons. First, majority of Alibaba’s initiatives are in China

which is one of the most interesting consumer markets around the world. China is the world’s

second largest economy that has seen a massive undigestible growth as determined by all the

economic indicators like GDP, FDI, Poverty rates, employment rates, GNI, industrial production,

trades, etc. Also China has the largest middle class market and its GNI per capita has increased

5

tremendously from $1000 in 2000 to more than $10,000 in 2020 which considering its

population this is regarded as a massive economic growth and considering that China is a

developing country which means its economy is bound to grow furthermore.

Other than China’s economic growth which will while inevitably benefit Alibaba, Alibaba has

also a great TAM in the growing Chinese digital infrastructure that Alibaba plays an important

rule. According to the 2019 ted talk on China’s e-commerce boom, only 50% of Chinas 2 billion

population is frequently online and only half of those normally shop online so as the

digitalization accelerates there will be more opportunities in Alibaba’s TAM and market share.

Therefore as the sectors which Alibaba operates becomes more competitive, its TAM will

increase as well due to the pace of technology and this sector wouldn’t be a winner take all zero

sum game as the market capacity increases.

Alibaba’s ecosystem

• Tmall (B2C) e-commerce ,a third-party online and mobile commerce platform for brands

and retailers;

• Taobao Marketplace (C2C), a mobile commerce destination for costumers (like ebay)

• Alibaba Health Internet platforms for pharmaceutical and healthcare products;

6

• Alimama, a monetization platform; 1688.com and Alibaba.com, which are online

wholesale marketplaces;

• AliExpress, a retail marketplace for international costumers; Lazada, an e-commerce

platform in Singapore (B2C)

Tmall Global, an import e-commerce platform that strengthens international footprint for

Alibaba

• Further, it provides cloud computing, database, storage, virtualization network, largescale

computing, security, management and application, big data analytics, and Internet

of Things and other services for enterprises

• payment and escrow services through its payment subsidiary ant group (Alipay)

• movies, television series, variety shows, animations, and other video content.

Additionally, the company operates Youku, an online video platform like Youtube in US;

Alibaba Pictures and other content platforms that provide online videos, films, live

events, news feeds, literature, music, and other

• Online grocery company freeshippo and other Chinese retailers like Sunart, Kaola, etc

• In addition, the company offers pay-for-performance and display marketing services; and

Taobao Ad Network and Exchange, a real-time bidding online marketing exchange

• Cainiao Network logistic services platform; Ele.me, a delivery and local services

platform; Koubei, a restaurant and local services guide platform; Fliggy, an online travel

platform

• Amap, a mobile digital map, navigation, and real-time traffic information app; DingTalk,

a business efficiency app; and Tmall Genie, an AI-powered smart speaker

• Lastly they are working on innovative initiatives which they regard to as “new

commerce” like their Taobao Live and short video initiatives that they have consolidated

e-commerce with social media. For example in Taobao live merchants show their

products through live streaming where the costumers can buy instantly with couple of

clicks.

Alibaba Market dominance

§ Alibaba controls China’s e-commerce

market share by having more than

50% of the market share

§ Alibaba also leads the global

ecommerce market as its GMV

reached $1trillion USD , more than

double of amazon’s GMV at $500

billion USD

§ Alibaba cloud computing sector also

leads in the China’s market by

controlling 40% Market share in the

tremendously growing Cloud industry .

7

o Another opportunity is that IT is developing in china compared to America so

most companies don’t have the IT developments in place so they are jumping

straight to cloud computing .

o Alibaba has also been investing heavily in cloud computing as its revenue from

this sector has grown 40% Y/Y based on its last quarterly

§ Alibaba group also owns 30% of Ant group which is a fintech financial company that has

over 1 billion users and 80 million merchants

Alibaba’s Financials

§ The financials of this company look solid, the company grew its revenue in every

segment in the previous years, the total revenue grew about 40% y/y finishing 2020 and

has annual growth rate of 50% so far

§ The company itself and analysts believe that Alibaba would continue growing 20%

annually for the foreseeable future

§ This incredible CAGR of 20% sounds promising and logical considering this business’s

moat and the emerging TAM both Chinese digital platform economy as of until 2020

only 50% of China’s population were online, so there is a huge opportunity as its Total

Addressable Market is growing

B2C online retail market platforms in China Q4 2020

8

§ Alibaba is also investing to grow its business furthermore through R&D and M&A like

the recent purchase of Lazada, a promising e-commerce platform in Singapore to enhance

Alibaba’s international presence

§ The important financial ratios favour this company’s valuations compared to the industry:

forward P/E= 17.67 , price/sales= 0.81, price/book= 0.62, P/E= 25.49, eps= 8.34, gross

profit margin= 41.28%, net profit margin= 19.00%

§ Risks: this company is undervalued at this moment for a reason which is mainly due to

recent regulation disputes between company and Beijing. To summarize, the company

has been hit with one time fine over monopolistic practices as China has been more

willing to regulate tech sector like other countries

o Nonetheless, I believe this company is oversold because though increased

regulation would effect company in a negative way but this regulation is for

Alibaba’s other competitors like Tencent, Baidu and JD.com as well and

regulation won’t kill this company. Therefore I see the upside to be outweighing

the risks

 

Alibaba’s DCF

I have Projected the future free cash flows of this company for the next 5-years period using 15%

CAGR as it’s projected to grow 20% annually but I used 15 to be more conservative.

§ I have used the terminal growth rate of 10% as the growth rate will eventually slowdown

§ I have used the discount rate of 12% and it seems a lot considering the treasury bond’s

low yield percentage and almost zero interest rates ; however Alibaba’s stock is a risky

investment, so I want it to reward me more than the S&P500 index which has annual

return rate of 10-11%

§ Therefore, based on DCF analysis the intrinsic value of this firm is around $700 per

shares which tells me that it’s a good investment for me at the $220 price

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231.21

Target Price

8/ 10

Confidence

3+ Years

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