Alibaba: Another Confirmation That The Business Is Undervalued

Seekingalpha2023-03-30

SummaryThe division of the E-Commerce giant is lifting the grim sentiment around the company, and a new chapter of Jack Ma's empire is beginning.Alibaba meets the requirements of a wonderful business....

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Despite the uncertainties associated with an investment in a Chinese company, the reward may significantly outweigh the risk.The calculated intrinsic value of BABA shows that the company is severely undervalued which aligns with the valuations presented in previous articles.CeBIT 2015 Technology Trade FairIntroductionAlibaba (NYSE:BABA) strikes with news that has shaken the investment communities. On March, 28 the company announced a new organizational structure to make its businesses more responsive to market changes and promote innovation. The plan involves creating six major business groups, each with its own CEO and board of directors. The groups are Cloud Intelligence, Taobao Tmall, Local Services, Global Digital Business, Cainiao Smart Logistics, and Digital Media and Entertainment. These groups will have the flexibility to raise outside capital and potentially pursue their own IPOs, except for Taobao Tmall, which will remain wholly owned by Alibaba Group.The stock was volatile since the announcement while investors are revaluing the business and the impact of the split. Valuation of the Alibaba business was always a part of previous articles on the company. Only then one can assess when it's time to acquire a business or a part of it to meet his own required return on investment. This article will focus on individual business segments and their valuation. As stated in previous articles, Alibaba meets the requirements of a wonderful business. Despite the uncertainties associated with an investment in a Chinese company, the reward may significantly outweigh the risk.The aim of this analysis is to look briefly at each segment and its most recent quarterly performance one by one. Having an overview of all the parts, a valuation can be performed which will give the reader an intrinsic value of the business, based on the applied assumptions.Cloud Intelligence GroupAlibaba Cloud IntelligenceCloud Intelligence (Alibaba)Cloud segment: Alibaba Cloud and DingTalk. Alibaba is considered the biggest infrastructure-as-a-service provider in the Asia Pacific and the third largest in the world by revenue. In addition, the company is the biggest provider of public cloud services in China. Alibaba Cloud offers various cloud services, including servers, computing, storage, network, security, database, and IoT services. They use these services to provide their customers with industry-specific solutions for better decision-making and operations. They also offer DingTalk's solutions to their enterprise customers to improve work collaboration and access big data analytics and AI capabilities. DingTalk is a digital collaboration platform that provides new ways for enterprises and organizations to work together.Alibaba's Cloud segment revenue in Q4 2022 was RMB20,179 million ($2,925 million), a 3% increase from the previous year. The increase was mainly due to strong growth in public cloud revenue, although hybrid cloud revenue declined. Non-Internet industries, such as financial services, education, and automobiles, contributed 53% of overall Cloud revenue and grew by 9% year-over-year. However, revenue from customers in the Internet industry declined by 4% due to reduced demand from a top customer for overseas cloud services, which was partially offset by growing demand from other customers in China's Internet industry.Taobao Tmall Business GroupAlibaba China CommerceTaobao Tmall Business Group (Alibaba)Alibaba's Taobao Tmall Business Group, currently known as China Commerce retail businesses primarily include Taobao and Tmall, which together constitute the world's largest digital retail business in terms of GMV as of March 31, 2022. Additionally, Taobao Deals offers consumers value-for-money products, Taocaicai provides next-day pick-up services for groceries and fresh goods at neighborhood pick-up points, and the company's direct sales businesses offer upgraded consumer experiences with integrated online and offline capabilities, including Tmall Supermarket, Freshippo, and Sun Art. In FY 2022 Alibaba generated approximately 67% of its revenue from its retail commerce business in China. The company has also developed a digital commerce infrastructure that offers an upgraded consumer experience by seamlessly integrating online and offline capabilities for its marketplaces and direct sales businesses. Furthermore, 1688.com, China's largest integrated domestic wholesale marketplace in 2021 by net revenue, connects wholesale buyers and sellers across a wide range of categories.The revenue from the China Commerce retail business in the fourth quarter of 2022 was RMB165,765 million ($24,034 million), a 1% decrease from the same quarter in 2021. Flat revenue was mainly due to the soft consumer demand and ongoing competition, resulting in a mid-single-digit decline of online physical goods GMV generated on Taobao and Tmall. Segments that experienced significant growth were Freshippo and Alibaba Health. The revenue from the China commerce wholesale business in the same quarter was RMB4,221 million ($612 million), remaining stable compared to the same quarter in 2021.Local ServicesAlibaba Local Consumer ServicesLocal Consumer Services (Alibaba)The company utilizes online and mobile technology to improve consumer services in two distinct scenarios: \"To-Home\" and \"To-Destination\". The \"To-Home\" businesses, such as Ele.me and Taoxianda, allow consumers to access merchant services from home, including food and beverage delivery, groceries, and pharmaceutical products. The \"To-Destination\" businesses, including Amap, Fliggy, and Koubei, provide consumers with convenient access to quality services at their destinations, such as navigation, travel services, and local services. These services offer targeted marketing solutions, digital operation capabilities, and analytics tools to merchants while providing consumers with easy access to quality services.In the last quarter Alibaba's revenue from Local Consumer Services, was RMB13,164 million ($1,909 million), showing a 6% increase compared to RMB12,466 million in the same quarter of 2021. The increase was primarily due to positive growth in GMV of the \"To-Home\" business driven by a higher average order value of Ele.me.Global Digital Business GroupAlibaba Global Digital Business GroupGlobal Digital Business Group (Alibaba)Alibaba's future Global Digital Business Group operates both retail and wholesale businesses to connect buyers and sellers across the globe. The International Commerce Retail businesses include Lazada, AliExpress, Trendyol, and Daraz. Lazada is a fast-growing e-commerce platform in Southeast Asia that provides access to a wide range of products. It also operates a reliable logistics network for its consumers and merchants. AliExpress enables global consumers to purchase directly from manufacturers and distributors around the world. Trendyol is a leading e-commerce platform in Turkey that offers a broad selection of products and services, including instant delivery services for food and groceries, leveraging its product sourcing capabilities and supply chain advantages in Turkey. Daraz is a leading e-commerce platform across South Asia, with key markets in Pakistan and Bangladesh. Besides that, the International Commerce Wholesale business operates Alibaba.com, China's largest integrated international online wholesale marketplace, connecting buyers and sellers across more than 190 countries in the fiscal year 2022.International Commerce Retail business experienced strong growth in the quarter that ended December 31, 2022, with revenue increasing by 26% year-over-year to RMB14,644 million ($2,123 million). This growth was primarily driven by an increase in revenue contributed by Trendyol. On the other hand, revenue from the International Commerce Wholesale business remained stable at RMB4,821 million ($699 million) compared to the same quarter in 2021.Cainiao Smart LogisticsAlibaba Cainiao Smart LogisticsCainiao Smart Logistics (Alibaba)Cainiao provides one-stop-shop logistics services and supply chain management solutions to merchants and consumers using its self-developed logistics capacities and capabilities. It also digitizes the entire logistics process using data insights and technology to enhance consumer experience and efficiency. For consumers, it offers parcel pick-up services through Cainiao Post, a network of neighborhood, campus, and rural village stations, and residential self-pick-up lockers. For merchants, Cainiao offers customized fulfillment solutions through its provincial, city, and county-level fulfillment network in China. Besides that, Cainiao supports merchants on cross-border and international commerce retail platforms globally, such as AliExpress, Tmall Global, and Lazada.In Q4 2022, Cainiao's revenue from domestic and international logistics services and supply chain management solutions was RMB16,553 million ($2,400 million), up 27% from the same period last year. The increase was mainly due to improvements in domestic consumer logistics services and international fulfillment solutions. Total revenue generated by Cainiao, including services provided to other Alibaba businesses, was RMB23,023 million ($3,338 million), up 17% from the same period last year.Digital Media and Entertainment GroupAlibaba Digital Media and Entertainment GroupDigital Media and Entertainment Group (Alibaba)Our digital media and entertainment segment complements our commerce businesses by leveraging the insights gained from our proprietary data technology to deliver relevant content to consumers. Youku and Quark are key platforms for digital media and entertainment content distribution, while Alibaba Pictures offers an integrated platform for content production, promotion, and distribution. Our other platforms, including newsfeed and literature platforms, allow users to discover and consume content and interact with each other. We also develop, operate, and distribute mobile games through Lingxi Games.In Q4 2022, Digital Media and Entertainment segment revenue was RMB7,586 million ($1,100 million), representing a 6% decrease from the same quarter in 2021. The decline in revenue was mainly due to a decrease in revenue from Alibaba Pictures.Ant GroupAnt Group is a financial technology company 1/3 of which is owned by Alibaba. The company operates Alipay, a mobile and online payment platform with over a billion users in China. In addition to payments, Ant Group also offers a range of financial services, including wealth management, micro-lending, insurance, and credit scoring.Ant Group was set to have the world's largest initial public offering (IPO) in history in November 2020, with a valuation of over $300 billion. However, the IPO was suspended by Chinese regulators, citing concerns about Ant Group's regulatory compliance and corporate governance. Since then, Ant Group has been working to address regulatory issues and has been restructuring its business.In March 2022 Ant Group was valued at $180 billion by Warburg Pincus, which is substantially lower than before the suspended IPO.Alibaba Business Groups' ValuationValuation of the Alibaba business groups was done based on their revenues and estimated growth for FY2023. Revenue-based valuation is not the most accurate one and the margin of error is relatively big. Unfortunately, all the groups except for Taobao Tmall Business and Cloud Intelligence are currently unprofitable on an EBITA basis. That's why a revenue-based valuation seemed to be the most reasonable when assessing each business group separately. The following estimates were made:Growth for FY 2023 equals growth for nine months ended as stated in the most recent Q3 quarterly report.Business groups with the highest expected growth were assigned a 5-year average Price-to-Sales (P/S) ratio of 6.62.Taobao Tmall Business was valued at half of Amazon's (AMZN) 5-year average P/S Ratio.Local Services and Digital Media and Entertainment received 5-year average P/S ratios of Uber (UBER) and Bilibili (BILI) respectively.Alibaba ValuationAlibaba Business Segments Valuation (Author - Data from Alibaba)The suggested value of all business groups combined totals $450.63 billion. Assuming that Ant Group is worth $180.0 billion and Alibaba owns 1/3 of it, an additional $60.0 billion has to be added. This results in $510.63 billion. As mentioned previously, due to the higher possible error than in discounted earnings models, an appropriate margin of safety of 25% should be applied.The final value of Alibaba Group calculated as a sum of individual parts equals $382.97 billion which translates to $143.5 a share. This number shows that the company is severely undervalued which aligns with valuations presented in previous articles.ConclusionAlibaba's structure has expanded over the years. Many new pieces were added as the market demand for new products and services was growing. Now it might be a great time to let the separate business groups be run by their own CEOs and to give them more independence. The company became highly diversified and it has massively increased in size. This also might be the main reason why the business is being split. Regardless of the reasons, this solution is lifting the grim sentiment around the company and a new chapter of Jack Ma's empire is beginning.Alibaba has positioned itself extremely well by expanding into areas such as cloud computing, digital payments, and logistics. In addition to its main e-commerce business, these segments have become growth drivers providing additional revenue streams for the company, and soon as separate entities.Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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