There are a few ways to determine which e-commerce company in the world is the biggest, by revenue, market capitalization or gross merchandise volume (GMV). GMV refers to the total value of all items sold on the online platform.
Alibaba has surpassed the milestone of USD 1 trillion in GMV for the financial year ended 31 March 2020, and is undoubtedly the biggest e-commerce company by this measure, far ahead of Amazon in second place.
Does this mean one should definitely buy Alibaba since growth of e-commerce is slated to continue its high growth trajectory?
PHD Analysis
Profitability
Let’s first take a look at Alibaba’s fundamentals. As of the financial year ended 31 March 2020, Alibaba is a highly profitable company as can be seen below. The net margin achieved is impressive and the cash generation is powerful. No doubt, there seemed to be some margin pressure in 2019 and free cash flow seemed to have declined in recent years but this could perhaps be attributed to continual investment in new businesses and investments.
Financial Health
It is also quite obvious that Alibaba has a strong set of balance sheet. The tremendous free cash flow generated every year will further strengthen Alibaba’s financial position and also allows it to invest in further innovations.
Growth Drivers
How fast can Alibaba continue to grow over the next 10 years, or the next 20 years? The past 10 years has been a stage of exponential growth for Alibaba, with CAGR of more than 50% for both revenue and eps. Where are the further growth drivers? Is e-commerce growth sufficient to drive the future growth of Alibaba? Will Alibaba lose a lot of market share to JD.com and Pinduoduo? These are perhaps questions a long-term investor has to ponder through. It is obvious that the global e-commerce sales is still projected to trend up but does Alibaba have the durable economic moat to withstand more and more competitions?
Alibaba’s Lines of Businesses
It is important to realize Alibaba’s ownership of diverse lines of businesses across e-commerce, cloud computing, digital media & entertainment and other innovations. Alibaba also has a 33% stake in Ant Financial which is slated to have its IPO on the Shanghai and Hong Kong stock exchanges. E-commerce is still the core today, with 86.7% of the revenue contribution. The one that particularly catches my attention is the cloud computing business. Alibaba is number one in cloud computing in Asia Pacific and the YoY growth is tremendous. This line item is still yielding negative earnings but it is moving towards profitability, the latest quarter showing -3% EBITA margin.
I believe the cloud computing business is of strategic importance to Alibaba’s future growth, something the CEO Daniel Zhang has emphasized too.
This chart below may be of interest to you. Many people say Alibaba is the Amazon of China but actually there are important differences between them which I shall not cover here. The important point here is that Amazon derives most of its income from its AWS cloud computing services! What does this mean for Alibaba when it achieves further scale for its cloud computing business and turns profitable?
Google has “other bets”, Alibaba has too from video streaming services to New Retail, Artificial Intelligence, Electronic Vehicles (they have invested in Xpeng which is filing for IPO too) etc etc. Would any of these become the next super growth engines?
Valuation
I am absolutely very positive about the further growth potential of Alibaba. We started discussing this company a while back and some of you have picked up some shares or use Sell Put strategy with good profits. The share price has reached all time high now at $289, so is it too late to enter?
As always, you will have to make your own personal investment decision. This is just my view. With some conservative growth projection, I estimate the intrinsic value to be about $300, this is not taking into consideration the gains from Ant Financial IPO and when cloud computing turns profitable. I want to have better entry points into the stock, and any pull back of the share price perhaps arising from further US-China tensions will present good opportunities, especially for long-term investors. Sell put strategy continues to be great and if you would like the strike price to be lower, you can choose to go for longer option expiry dates.
Disclaimer: materials presented do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.