Is Alibaba a good buy or should I sell it now? This is probably one of the hottest questions being discussed not just on Wall Street, but among retail investors as well. With its price dropping from USD$317.0 in Mid Oct 2020 to USD$236.26 on 29th Dec 2020 as Alibaba is hit by waves of ‘bad news’. As Jack Ma Criticises the Chinese Government, Ant Financial IPO suspended and Chinese Government investigates Anti-trust violations.
Countless analysts have given their Alibaba stock predictions these few days, I’ll be giving you my thoughts on it. I’ll do Alibaba stock analysis using my Zero to Hero Stock Value Investing™ strategy.
Alibaba Business Overview
Before we invest in any company, we must first know what the business does. So, how does Alibaba make money?
*Alibaba is the world’s largest retail commerce business in terms of Gross Merchandise Value (GMV). Its main businesses comprise of E-commerce, cloud computing, digital media and entertainment.
Ecommerce: TMall, Taobao, Alibaba.com, AliExpress, Lazada etc.
Cloud computing: Alibaba Cloud
Digital Media and Entertainment: Alibaba pictures, Alibaba music, Youku.
Alibaba’s Fundamental Analysis
Here, I’ll perform a fundamental analysis on Alibaba Group Holding Ltd (BABA) listed in the New York Stock Exchange (NYSE) based on some of the criteria in my Zero to Hero Value Stock Investing™ strategy.
Does Alibaba Have Consistently Increasing Sales, Net Income and Cash Flow from Operations?
As you can see from the financial report below, Alibaba has generate consistently increasing revenue for the past few years from 2017 to 2020.
Alibaba started in April 1999 and net income has been increasing for the past few years and that is a good sign. Refer to Table 2
Cash flow from operations has been increasing year on year in the recent years for the past 5 years which passes the criteria.
Does Alibaba Have a Wide Economic Moat?
The next criterion I look for is a wide economic moat. This refers to an intrinsic characteristic within a business that allows it to withstand competition and continue to dominate in its industry for years to come. For a business to have a wide economic moat, it needs to have few to zero competitors.
Alibaba do have a wide economic moat.
- Brand Monopoly
-Alibaba is the China’s market leader in e-commerce.
-Chinese consumers will think of Taobao and Tmall when searching for products and services online.
- Network Effect
-Alibaba’s platforms attracts both sellers and buyers, creating a sustained and self-reinforcing competitive advantage.
-Alibaba’s various online marketplaces are interconnected, compounding effect further.
- Economies of scales
-Alibaba’s ecosystem allows easy funnelling of users from one platform to another, reducing users’ acquisition cost.
-Alibaba is able to negotiates for lower prices with vendors and in turn, pass the benefits to its consumers.
Here are some interesting statistics.
Does Alibaba Have Conservative Debt?
Alibaba have a very conservative debt as we can see from the free cash flow. This tells us that the company is less likely to fall in times of economic or financial crisis or during bad times.
*Data courtesy from Macrotrends.net 30/12/2020 Figure 2.
Is Alibaba Overvalued or Undervalued?
To determine whether Alibaba is undervalued or overvalued, we need to find out its intrinsic value, which we can do so with my intrinsic value calculator in my Zero to Hero Value Stock InvestingTM course. Based on calculation, the intrinsic value would be USD$ 380 assuming that that investigation clears Alibaba of monopolistic practices or company pays a small fine for anti-trust violations and there is no impact on Alibaba’s growth rate and valuation.
Another possible scenario is that moderate fines and changes to the company’s business model, preventing forced exclusive agreements, giving them the option of either listing their products solely on Alibaba’s platform or not at all. If the impact to company’s growth rate is at a reduction of est. 20%. I would take the intrinsic value of USD$304.
The purpose of calculating two sets of intrinsic value is to give us a range of intrinsic values to consider. By current market price, Alibaba is significantly below both sets of intrinsic values, which gives us a clear idea that Alibaba is very undervalued @USD236.26 at the time of my publishing.
I hope you’ve gained some insight from this ‘FREE’ article. You can take up my Zero to Hero Stock Value InvestingTM online course which will soon be available in Jan 2021.
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