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Investor Does Fundamental Analysis on Alibaba (BABA) - Stock Analysis For Beginners

01 Jan 2021

Transcript

00:00 About Alibaba

Happy new year everyone! In 2021, let’s discover more investment opportunities and take massive action together!

In fact, just before 2020 ended during Christmas Eve, investors were hit with news that Alibaba is under investigation by Chinese regulators under the antitrust law. On that trading day, Alibaba’s share price saw a huge drop from around USD256 per share to around USD215.

And during that period, there were 2 kinds of investors. Those that bought Alibaba shares and those that sold theirs! So, what should you do?

Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you. We upload new episodes every Friday!

In this episode, let’s talk about Alibaba! It’s listed on the New York Stock Exchange under the ticker BABA.

Alibaba has been in the news A LOT lately. First, with subsidiary Ant Group’s dual listing mega IPO being suspended. Then, there’s the US bill that threatens to delist Chinese companies like Alibaba from the US stock exchange. And the most recent one which is the antitrust probe by Chinese regulators. So, Alibaba is definitely facing some heat and pressure from many sides.

If you have invested in Alibaba share, it’s definitely testing your emotional stability. Like always, we always go back to the business fundamentals to check if they’re still intact to determine if Alibaba is a worthy investment.

01:43 Alibaba Business Overview

First, let’s breakdown the business model of Alibaba.

Alibaba has 4 main business segments. They are core commerce, cloud computing, digital media & entertainment, and innovation initiatives.

The core commerce is the largest segment, contributing to 84% of Alibaba’s revenue. It consists of retail commerce, wholesale commerce, and consumer services. They include Taobao, Tmall, Aliexpress, Lazada, and more.

Next is the cloud computing business segment which is still pretty new. It contributes to 10% of revenue but this segment is expected to experience high growth. Alibaba Cloud, the data intelligence backbone of Alibaba Group, provides a set of global cloud services like storage, data analytics, AI, IoT, developer services, security and more.

As for the digital media and entertainment business segment, it includes platforms like Youku and Alibaba Pictures. They’re involved content distribution, production and moving into licensing and creating original content similar to Netflix and Hulu.

Last but not least, the innovation initiatives. There’s Amap, which is the largest provider of mobile digital map like Google Maps and there’s DingTalk, the largest workplace collaboration app like Slack and Microsoft Teams.

So how does Alibaba make money from all these business segments?

Under core commerce, they generate revenue from merchants through the sale of a variety of marketing services, membership fees, customer management services, product sales, commissions on transactions, and software service fees. They also generate revenue from consumers through platform commissions and on-demand delivery service fees

For cloud computing, Alibaba makes money through duration and usage of their cloud service.

In terms of digital media and entertainment segment, Alibaba charges customer management services and membership subscription fees. Meanwhile, the innovation initiative segment receives revenue from services fees and product sales to enterprise customers and consumers.

03:43 Alibaba Growth Potential

Now let’s look into the growth potential of Alibaba.

Alibaba is a mega-cap and it’s already so huge, but can it still grow? Well, I would say yes.

From 2015 to 2020, the number of active users on Alibaba grew by 102%. As for the e-commerce trend, it has been growing steadily as well every single year and will continue to grow.

Besides that, Alibaba is already breaking record every year during 11/11 or Single’s Day which is a huge shopping event that they created. Due to Covid-19 this year with everyone stuck at home, Alibaba hit USD74 billion in sales compared to USD37.4 billion in 2019. In fact, the huge Black Friday and Cyber Monday sales don’t even come close the number of sales that Alibaba generates every year on 11/11.

Another factor of growth for Alibaba is in their cloud computing service. Cloud penetration in China is currently still at an early stage but the country is spending a lot to build their cloud infrastructure.

As of 2019, Alibaba’s cloud computing service is the third largest globally in terms of market share after Amazon and Microsoft and beating Google. And in the APAC region, Alibaba is the largest.

In the latest quarterly report, Alibaba reported a 60% YoY growth in terms of revenue for cloud computing.

Besides that, Alibaba also owns 32% of Ant Group, formerly known as Ant Financial. Ant Group owns China's largest digital payment platform, Alipay, which serves over ONE BILLION users and 80 million merchants. I have done a detailed analysis on Ant Group previously, so click on the link to watch that video. You can also find the link in the description box!

Lastly, for Alibaba, they aspire to be a good company that will last for 102 years! So you know they’re in it for the long term. Alibaba’s culture, business models and systems are built to last so they can achieve sustainability in the long run. For me as an investor, that’s something I find to be very reassuring.

In terms of Alex Meter, I rate Alibaba’s growth to be really exciting and optimistic!

05:53 Alibaba Moat

Let’s see the strengths or competitive advantages of Alibaba.

First, is the network effect. Alibaba is so deeply embedded in China's economy as well as the daily lives of citizens of China. The annual active consumers on Alibaba’s online shopping platforms in China reached 757 million as of June 2020. With the huge number of active users and platforms under Alibaba, they collect a massive amount of data. And with this big data, Alibaba is able to come up with smarter algorithms to create better products and attract even more users, and the cycle continues!

The second strength is the high switching cost. As a merchant on Alibaba, it’s hard, if not impossible, to find another platform that can replicate what Alibaba provides. This is because Alibaba has all the different platforms and provides the cloud services, logistic services, payment services, everything you need to run your business smoothly.

So it’s incredibly difficult and also costly for merchants to switch to another platform.

In terms of Alex Meter, I rate Alibaba’s strength to be very good.

07:02 Alibaba Risks

Let’s talk about the risks that Alibaba faces. First is the science & tech risk. Just like any other tech stocks, Alibaba relies on technological advancement and development. The business provides consumers with ecosystem services and network security systems, which is why they face a high degree of tech risks.

Second is the regulatory risk. Due to tensions between China and the U.S., President Donald Trump has signed a bill that could delist Chinese companies like Alibaba from the U.S. stock exchanges. China has also recently launched antitrust investigation which is an anti-monopoly measure. Alibaba has been on the receiving end of this investigation.

While I acknowledge these recent news and the regulatory risk that Alibaba faces, I doubt that it will be a major impact on Alibaba’s business fundamentals and growth potential.

The reason being Alibaba’s strong competitive advantage. There are so many merchants using their platform to market, sell and collect payments. There is also their massive base of users, using zhi fu bao to make payment, to buy insurance and investment products via Ant Group. Besides that, Alibaba Cloud is also one of the biggest cloud computing services in the world.

Many businesses and people are depending on Alibaba’s services since it’s integrated into so many people’s everyday life, especially in China.

So, I don’t think regulators will allow Alibaba’s business to be impacted badly because it will deeply affect China’s economy. But of course, no one knows what the outcome of the investigation will be. Anything could happen, so this is a risk that investors must take note of. When there is new information on the investigation, I will do a video update to share some thoughts!

In terms of Alex Meter, I rate Alibaba’s risks to be moderate risk.

08:52 Alibaba Financial

Let's look into the financials of Alibaba. We can see that the revenue is actually growing very, very fast. Right now it's hitting about CNY 584 billion. In terms of net income, they also experience high growth as well currently hitting about CNY 102 billion.

In terms of gross profit margin, you will realize Alibaba is able to hit more than 40% gross profit margin and double digit net profit margin. With a strong and consistent return on equity as well, they have a debt to equity of 0.15x which is manageable. Alibaba is able to generate a very, very strong cash flow and free cash flow as well.

In terms of Alex Meter, I rate Alibaba's financials to be strong and healthy.

09:38 Alibaba Valuation

Lastly, let's look into the valuation of Alibaba. Because Alibaba is able to generate a very strong free cash flow. I will be using discounted cash flow to value Alibaba.

As of 2021 Quarter 2 free cash flow / share is USD 7.76 with a 1.67% discount rate which is 10 years local government bond rate. I predict a 15% growth for the first 5 years and a 10% growth for the next 10 years as their terminal growth rate which comes out the value is USD 284 a share.

10:13 Like & Dislikes about Alibaba

Here are the 3 things I like and dislike about Alibaba.

First thing I like is the strong economic moat of Alibaba. The Chinese economy is heavily reliant on Alibaba services. This makes the company super strong and sustainable.

Second thing I like is the great growth potential. With more consumers globally switching their purchasing habit to online, Alibaba’s core commerce stands to benefit. On top of that, due to the pandemic, more businesses have shifted their operations online to support work from home arrangement. This shifted a lot of people’s working behaviour and requires more cloud computing services, which benefits Alibaba Cloud as well.

Third thing I like is the company’s strong financials. Alibaba is showing steady growth in profitability and a strong financial health.

Now, the dislike!

What I don’t like is Alibaba faces a high regulatory risk. Alibaba has grown to a size that it is too big to be ignored. They have become an easy target. Despite having a strong moat, any policy changes could impact the business.

And that’s all I can think of what I dislike about Alibaba. I have to admit, I’m biased! This is because I have a vested interest in Alibaba. Perhaps you can share with me in the comments what are other risks or threats that I might be blind to and should take note of in my Alibaba investment.

After watching my analysis, would you consider adding Alibaba into your portfolio?

Comment down below at least one thing you learned from my sharing in this video.

Any other companies you would like to see me analyse? Submit your requests in the comments section as well!

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Till then, I’m Alex and Happy New Year, everyone!