General company overview and key points explaining why Alibaba is a large part of my portfolio currently.
Alibaba Group Holding Limited: BABA
Founded by the infamous Jack Ma in 1999, Alibaba has expanded from a small business-to-business marketplace to a multifaceted e-commerce/technology/internet conglomerate. 20 years after its founding, Alibaba has become one of the top 10 most valuable firms in the world ($451B market-cap as of 7/17/2019).
Alibaba separates their core operating segments into four categories: core commerce, cloud computing, digital media and entertainment, and innovation initiatives/other. In Alibaba’s 2019 fiscal year, 86% of total revenue came from the core commerce segment, and the segment grew around 50% YoY. The core commerce segment includes several brand names such as, Taobao, TMALL, AliExpress, Alibaba, and 1688.4
Alibaba’s other segments are also growing strongly. The cloud-computing segment (which we know is a large growth area in the U.S. for both Amazon’s AWS offering and Microsoft’s Azure offering)6 grew 84% YoY, the digital media and entertainment segment grew 23% YoY, and the innovation/other segment grew 42% YoY. Below is a graphic from Bloomberg that shows the latest four fiscal years of total sales for Alibaba’s four core segments.
Another note of importance, Alibaba Group owns one third of the fintech firm Ant Financial.3 According to Alibaba’s investor relations page, “Ant Financial…is a technology company focused on providing inclusive financial services to consumers and small and micro businesses, or SMBs, in China and across the world. It primarily operates digital payment services and financial technology platform services through sustained technological innovation and cooperation with financial institutions, and is also pursuing a globalization strategy.”4 Ant Financial’s last capital raise in 2018 brought in $14B at a valuation of around $150B (surpassing the value of many U.S. financial goliaths).5
Many investors are fearful to put capital into Chinese firms for a plethora of reasons, but the benefits that have historically come from investing in an economy consistently growing over 6% a year should outweigh most concerns. In 2018 China’s GDP grew 6.1% while U.S. GDP grew 2.2%.1 Furthermore, only 58% of China’s population is actively using the internet.2 As the China continues to become more developed, consumer spending will increase and Alibaba should be a large beneficiary of that growth.
Lastly let’s take a look at the valuation. Amazon is a clear comparable firm to Alibaba, both are heavily involved in e-commerce, media and cloud. So let’s take a quick look at how their fundamentals stack up.
Using the Bloomberg Terminal I pulled the current Market Cap, Trailing 12-Month (T12M) Total Revenue, 3-Year Average Sales Growth, T12M Net Income, Current P/E ratio, T12M Cash Flow from Operations and the Net Debt for Alibaba, Amazon, JD and Ebay.
As you can see, as of 7/19/2019, Amazon had a market-cap of $967B versus Alibaba with a market-cap of $450B. That difference is understandable given that Amazon currently has much higher total sales than Alibaba does ($242B compared to $56B). On the other hand, Alibaba is better at converting those sales into profit, the T12M net income of Alibaba is $13B compared to Amazon’s $11.4B. In addition to its superior profit margin, Alibaba also boasts the largest 3-Year Average Sales Growth rate in the peer group, 55% compared to the peer median of 33%.
Alibaba has a lot of perceived risk built into its current market price in my opinion, this claim is substantiated by Alibaba’s forward P/E ratio of 36X compared to Amazon’s 86X. In the future, as the U.S.-Chinese trade tensions get worked out and China continues to become more developed and expand its GDP, I expect Alibaba to continue its steady and strong growth. I forecast Alibaba will prove itself to be a GARP investment and plan to hold the stock for many years to come.