Alibaba (BABA)

Investment Opportunity?

Brand value? Alibaba, Taobao, Tmall. Now owns 83% of Lazada.

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Use of new technology to disrupt? Cloud computing business (5% of total revenue) has grown 100% yoy, 1 million paying users, but still not profitable.

Sympathy/spillover effect on valuation? E-commerce giants have been the best performing stocks in the past 2 years but this company is one of the drivers.

Trading Opportunity?

Potential sector or index selling? Being such a prominent brand its likely to be the cause and not the effect of sector buying/selling.

Under/over-reaction to news?

  • Earnings is the only obvious market moving news lately

Revenue

  • Recently grew 56% yoy
    • Core commerce RMB 43b up 58%
    • Cloud computing RMB 2b up 100%
    • Digital media RMB 4b up 30%
    • Innovation initiatives RMB 0.6b up 21%
  • Only the core commerce is profitable at this point in time

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Strategy

  • Continue to invest in business to support future growth
    • Tmall Supermarket
    • Cloud computing business
  • Expand user base and enhance user experience rather than make money
  • Continue to make strategic investments to expand user base and geographic coverage
    • Increased ownership in Lazada to 83%

Approximate Valuation

  • Too much brand value to determine precise valuation
  • Operating profit grew 65% but net income fell 42% in FY2016
  • Net cash of approx $3 per share, apart from that cash flows and expenditures are too unpredictable to model given the experimental expansion strategy
  • P/E ratio or PEG ratio is our best valuation metric

Watching

  • Cloud computing business growth rate

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