Alibaba (BABA), the Chinese tech giant connects businesses around the globe in an innovative way and upgrading the interaction between business players to reach a global presence. It provides the technological infrastructure and marketing fundamentals to help merchants leverage the use of the internet through e-payment services, shopping search engines and cloud computing services and engage with their customers on a user-friendly platform.
Alibaba has operations in more than 200 countries and is currently among the world’s largest retailers and e-commerce companies. Recently, short interest in the company increased which led the stock price to undervalued levels. The company is still a buy option for investors looking to add value to their medium to long-term portfolios and it is the right time to grab this opportunity.
The company is expected to release its second quarter profits on August 23rd and is estimated at $1.21 per share versus $1.16 during the same period last year.
Alibaba’s stock price decreased by almost 16% during the recent period and is currently trading at its lowest levels since last year. Investors are worried of the US-China trade war implications on companies’ operations and their going concern. However, if we dig into the financial numbers of Alibaba, we can clearly conclude that the major return of the company is mainly from international customers.
In fact, in its yearly report, Alibaba states that their operations are highly dependent on consumer spending and online commerce specifically. The revenue may be materially impacted by a slowdown in the Chinese economy since it represents a major part of the company’s revenues. According to the National Bureau of Statistics of China, Chinese economy growth has slowed in recent years compared to prior years. GDP growth rate reached 6.9% in 2015 compared to 6.7% and 6.9% in 2016 and 2017 respectively.
The bearish sentiment for the Chinese market has been ongoing since the beginning of 2018, caused mainly by the trade war news. The Shanghai Composite index has actually declined by 24% since January. However, selloffs due to trade war were emotionally-driven trades due to the fact that total traded value of goods between China and the rest of the world is very high relative to its traded value with the United States.
Source: Economist – IMF
In its last quarter financials, it was remarkable the growth in the Cloud Computing division, which reached a 103% year over year growth. Management is currently working on developing this division through an aggressive expansion on many levels.
Europe was Alibaba’s destination to expand its Cloud’s success outside China and Asia:
- The company is in talks with BT Group (NYSE:BT) about a cloud services partnership.
- A German partnership started with Vodafone (NASDAQ:VOD) in 2016 which allowed the telecommunications company to resell Alibaba’s services.
- Last month, Alibaba Cloud agreed with Bollore (OTCPK:BOLRF) to develop projects in cloud services and Artificial Intelligence.
Alibaba group has acquired a stake of its Turkish counterpart Trendyol. This deal is expected to create new opportunities in e-commerce and online payments in Turkey.
Alibaba Cloud is the largest cloud service provider in China and is ranked as the third largest worldwide. It has 18 data center regions covering more than 70 countries with more than 1300 nodes. Alibaba Cloud replaces the traditional data transmission, centered on web servers, and distributes its user requests to the most suitable nodes around the globe allowing the fastest retrieval of requested content. On the blockchain side, Alibaba Cloud is encouraging users to try this new technology, which is expected to be improved and enriched on a continuous basis according to market requirements.
In addition, Alibaba Cloud launched recently a new set of products meeting the needs of retailers who are willing to digitize their operations under the New Retail concept by integrating online and offline shopping experience.
According to Alibaba’s Strategic M&A and Investments report, management is using their capital in the most efficient manner when taking investment decisions and focusing on four goals:
- Synergies with Alibaba.
- Innovation in products and services.
- Value creation.
- Binary outcomes.
Ant Financial, previously known as Alipay, is the biggest player on the Chinese online payment market. It is believed to be one of the key growth drivers for Alibaba group, which currently owns 33% of this fin-tech company. It has a huge growth potential especially with its blockchain projects, in addition to its wealth management products.
The main competitive advantage of Ant Financial is that it has a very large user base that is increasing steadily and counting around 520 million active users in 2017. During the 2017 Investor day, Eric Jing, CEO of Ant Financial Services announced that the total number of e-wallets increased by 10 times between 2015 and 2017, and the daily number of transactions increased by 13 times during this period.
Ant’s revenues last year reached $8.9 billion with almost 600 million customers. Ant is expected to go public in the next two years and is currently valued by analysts at $150 billion. Ant does not disclose its financial statements and its $2.1 billion earnings are calculated from Alibaba’s disclosures.
In 2017, the company produced a gross profit margin of 30% and a net income margin of 28%. Based on the average analysts’ estimates, it is expected that the company will generate a revenue of $60 billion in 2019 and $83.5 billion in 2020.
We end up with an estimated net income of $16.8 billion in 2019 and $23.4 billion in 2020, leading to a $6.41 EPS in 2019 and $8.93 EPS in 2020.
And if we apply the current P/E ratio, despite being at its lowest levels: 46.2.
We obtain a fair value of $296.14 for 2019 and $412.57 for 2020.
In addition, if we discount these prices at an estimated 15% required return per year. The fair value of Alibaba is estimated at $257 by the end of 2018. Thus, an upside potential of 50%.
Alibaba has significant growth potential in its long-term horizon whether in the Chinese market or on the international level. China has the world’s largest working force population with 800 million people, of which 770 million have access to the internet. Furthermore, Alibaba is aggressively working on expanding its presence overseas through investments and partnerships, with a growing international e-commerce operations platform. The cloud division and Ant Financial will be its main growth drivers in addition to innovation in blockchain technology.
Overall, the risks are currently overstated and trading in Chinese stocks is driven by emotional fear from the US-China trade war. For long-term investors, the pullback situation experienced during the recent period is triggering a suitable entry point at an undervalued price.
Therefore, Alibaba is currently a strong buy for the remaining period of 2018.
Disclosure: I am/we are long BABA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.