Our view
Alibaba Group Holding Limited (NYSE:BABA, BABAF) is one of the most controversial companies when it comes to investor opinion. Many believe it is a great business at a bargain price, whilst others believe the risks mean it is untouchable, even at a significant discount.
Putting the risks aside for a moment, there is a lot to love about Alibaba:
- the world’s largest global e-commerce platform, bigger than Amazon (AMZN) and JD.com (JD) combined based on GMV;
- a Cloud computing business in China which is a leader in a market which is expected to grow rapidly in the coming years;
- a dominant position in China and an increasing presence across Southeast Asia meaning it is well placed to benefit from economic progress in the region; and
- strong free cash flow and a solid balance sheet providing ample resources to continue to make strategic acquisitions and/or returns to shareholders.
Alibaba’s operating businesses currently trade at a multiple of around 9x owner earnings. And this is at a time when the company is in an investment phase, meaning margins are depressed and the true underlying earnings potential is underrepresented. Modest earnings growth combined with recovery in the valuation multiple could provide investors 30%+ annual returns over the next decade.
Based on these metrics, it is difficult to disagree that the current price represents an attractive valuation. However, the investment decision ultimately relies on the conclusion investors reach on the likelihood and impact of the various potential risks materializing.
When it comes to risks generally, investors can be guilty of ignoring them completely or assuming the worst-case scenario. In the case of Alibaba, we think the latter is true. Whilst there will inevitably be ongoing friction as the US learns to live in a world with a rising China, our view is that the world will ultimately continue to make progress and prosper over the long-term. We believe investors would do well by remaining rationally optimistic.
Even if we put our optimistic worldview aside, we feel that some of the risks are overblown. Only 10% of the company’s external revenue is generated through the regulated businesses held within the VIE structures, and this will only reduce as the company continues to diversify and expand internationally.
As for the potential de-listing from the NYSE, we would hope that agreement can be reached to avert this eventually. However, in absence of cooperation on that issue, the company is pursuing a dual primary listing in Hong Kong which will provide investors with an alternative market in an internationally recognized financial center.
Overall, we feel that the strength of its businesses combined with the significantly discounted valuation compensate for the actual severity and likelihood of the risks materializing. We think it is a clear “Buy” at the current valuation. Should these risks reduce or a long-term resolution be reached, we see reason to upgrade our rating to “Strong Buy.”
With that being said, each investor must consider this in the context of their own investment objectives, risk tolerance and psychological resilience. Bargains are never found in times of comfort and stability. As value investors with a long-term horizon and a deeply contrarian nature, we believe will be handsomely rewarded for the long and potentially rocky journey ahead.
An overview of Alibaba
Note from author: This section provides a description of the major services and businesses which are within the Alibaba ecosystem. For those who are already familiar with the operations of Alibaba, we suggest that you skip to the following section.
Alibaba is an e-commerce giant which serves 1.31 billion annual active consumers across the many platforms and businesses in the Alibaba Ecosystem. Total Gross Merchandise Value (“GMV”) transacted in the Alibaba Ecosystem in FY22 was RMB 8.3 trillion ($1.3 trillion), making it the largest retail commerce business in the world, according to Analysys.
Alibaba reports its business across a number of segments: China commerce, International commerce; Local consumer services; Cainiao; Cloud; Digital media and entertainment; and Innovation initiatives and others. We provide an overview of each below.
China Commerce
Alibaba’s China Commerce segment is primarily Taobao and Tmall. Together, these constitute the world’s largest digital retail business in terms of GMV for the twelve months ended 31 March 2022, according to Analysys.
Taobao
Taobao is the company’s main commerce platform and is both the starting point and destination portal for many users’ shopping journey. It allows individuals and small businesses to create online storefronts and product listings for free. Alibaba generates revenue through add-ons sold to sellers, such as analytics and marketing. As well as being a shopping platform itself, it acts as a funnel for other platforms in the Alibaba ecosystem.
Tmall
Tmall is the partner of choice for both domestic and International brands. The platform is essentially a virtual mall, allowing brands and retailers to operate their own unique storefronts. The platform has a wide range of brands, with 320,000 brands and merchants on Tmall, including over 80% of the consumer brands ranked in the Forbes Top 100 World’s Most Valuable Brands for 2021. It is the largest third-party online and mobile commerce platform for brands and retailers in the world in terms of GMV, according to Analysys. The platform differs from Taobao in that it charges retailers and merchants fees for setting up stores and a share of ongoing GMV, in addition to offering value-add services.
Other
There are a host of other platforms and businesses which cater to various markets. These include
- Taobao Deals – like Taoboao, but with a focus on value-for-money products;
- Taocaicai – a community marketplace that offers consumers next-day pick-up services for a wide range of groceries and fresh goods at neighborhood pick-up points;
- Tmall Supermarket – offers daily necessities, FMCG and general merchandise through Taobao app with same-or-next-day delivery services;
- Freshippo – a retail chain for groceries and fresh goods with over 200 stores offering 30-minute delivery to customers living within a three kilometer radius of the store; and
- Sun Art – an online and physical hypermarket.
Alimama
The company monetizes its broad user base and insights into customer behaviors through its Alimama platform. Alimama offers paid marketing services to merchants, retailers and promoters allowing them to advertise across its many platforms. This marketing is not confined to the Alibaba ecosystem, with affiliate programs allowing its users to directly market to consumers on other platforms outside of Alibaba’s.
In addition to ads within the Alibaba ecosystem, the company offers wider distribution through the Taobao Ad Network and Exchange (“TANX”), one of the largest real-time online bidding marketing exchanges in China. TANX helps publishers to monetize their media inventories both on mobile apps and web properties, automating the buying and selling of tens of billions of marketing impressions on a daily basis.
1688.com
Alibaba’s domestic wholesale business, 1688.com, is China’s largest integrated domestic wholesale marketplace in 2021 by net revenue, according to Analysys. Wholesalers pay a fixed annual subscription to sell with no additional fees, but can pay for additional premium features such as data analytics and marketing etc. These additional services account for the vast majority of income from wholesaling.
International Commerce
Lazada
Lazada is a leading and fast-growing e-commerce platform in Southeast Asia and serves one of the largest user bases among the global e-commerce platforms. It caters to merchants of all sizes, from individuals to regional and global brands. Lazada also operates one of the leading e-commerce logistics networks in Southeast Asia, with the vast majority of Lazada’s parcels going through its own facilities or first- and last-mile fleet.
AliExpress
AliExpress enables global consumers to buy directly from manufacturers and distributors in China and around the world. It is available in 18 languages and services consumers across many countries including the US and Europe.
Trendyol
Trendyol is a leading e-commerce platform in Turkey in terms of both GMV and order volume in 2021. It offers a large selection of products through e-commerce business as well as instant delivery services for food and groceries, as well as having its own fulfillment and logistics networks.
Alibaba.com
Alibaba.com is China’s largest integrated international online wholesale marketplace in 2021 by revenue, according to Analysys, serving over 40 million buyers from over 190 countries in FY22. Like its domestic wholesaling counterpart, Alibaba generates the majority of the revenue through this platform for the additional value-add services it offers to merchants.
Local Consumer Services
The company’s local consumer services business is looking to expand its reach beyond products into consumer services, whether that is at home through its “To Home” businesses or on the go through its “To Destination” businesses.
To Home
-
Ele.me – a leading local services and on-demand delivery platform which enables consumers to order food and beverages, groceries, FMCG, flowers and pharmaceutical products anytime and anywhere.
-
Fengniao Logistics – an on-demand delivery network which provides last-mile logistics services to orders placed through Ele.me as well as to other businesses in the Alibaba ecosystem including Freshippo, Sun Art, and Alibaba Health.
-
Taoxianda – an online-offline integration service solution for FMCG brands and third-party grocery retail partners, facilitates the digitalization of retailers’ operations.
To-Destination
-
Amap – a leading provider of mobile digital map navigation and…