Here is a deep dive on my understanding of Alibaba. It’s various operating segments, fundamentals, performance and returns; followed by valuation of the company based on the Discounted Cash Flow (DCF) model.
Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (GMV) ($1.24 trillion for China and overseas collectively for the fiscal year ended March 2021). Alibaba operates China’s online marketplaces, including Taobao (consumer-to-consumer), Tmall (business-to-consumer) and Alibaba Cloud which is the world’s third largest Infrastructure as a Service (IaaS) provider.
Operating Segments
- Core commerce – 87% of total revenue. Growing at a tremendous 42% overall (~50% 5 year avg).
- Retail commerce – 71% of total revenue, of which 66% come from China and rest internationally.
- Generate revenue from merchants by leveraging consumer insights and data technologies which enable brands and merchants to attract, engage and retain consumers, complete transactions, improve their branding, enhance operating efficiency, and offer various services.
- This segment is growing at 40-45% year over year.
- Wholesale commerce – 4% of total revenue, split half from China and international.
- 1688.com, China wholesale marketplace, matches wholesale buyers and sellers in various product categories and alibaba.com is operated globally. Revenue primarily through membership fees, value-added services and customer management services (on-line marketing).
- Cainiao logistics services – 5% of total revenue. Growing at 50-60%.
- Revenue by charging merchants for contracted orders and value added services.
- Local consumer services – 5% of total revenue.
- Includes delivery platform (Ele.me) and Koubei, restaurant/local services guide platform.
- Other – 2% revenue. Alibaba does not share what’s in this.
- Retail commerce – 71% of total revenue, of which 66% come from China and rest internationally.
- Cloud Computing – 8% of total revenue. Growing at 50% year-over-year. Growth has been slowing every year but that is expected as the segment becomes larger.
- Digital media and entertainment business – 4% of total revenue.
- Innovative initiatives – Accounts for1-2% revenue.
Retail commerce in China
As core retail commerce in China is the largest and the only profitable operating segment for Alibaba, let’s take a closer look at it.
Revenue in this segment comes from three main areas: marketing services for merchants, commissions on transactions and new retail initiative (direct sales and delivery from supermarkets). In 2016, ~50% of total revenue came from marketing services and the other 25% came from sales commissions on the e-commerce platform. So, Alibaba could potentially be seen as an Ad business company operating as an e-commerce company where major revenues comes from online marketing and commissions. As of 2021, Alibaba counts revenue from both online marketing and commissions as customer management. In 2021, Customer management was 43% of total revenue (opposed to 75%, 5 years ago). Customer management has been growing at 20% year over year but it’s portion in the total revenue has been shrinking due to greater revenues coming from various acquisitions Alibaba has made in the last 5-6 years.
All other operating segments
Revenue segments at Alibaba have drastically evolved in the last 5 years. With strong cash flows from China retail commerce, Alibaba has implemented a very aggressive investment strategy. They have invested in multitude of diverse businesses under its “New Retail” initiative (launched in 2016), on demand delivery and customer services. Only time will if these investments will incur profits for Alibaba. However, from my perspective these investments seem rushed (see annual highlights section of this blog for details on various acquisitions).
Out of the new revenue streams, cloud computing is the only one with a stable and predictable growth trend and though this segment is still not profitable, it is trending towards profitability as it grows.
The rest of the new revenue streams do not show any signs of profitability yet and are burdening the overall margins for the company. These include:
- E-commerce expansion to rural china – Part of “New retail initiative”, this involves digitizing existing retail shops and using them as warehouses for quicker delivery. This has tremendously grown revenue on Alibaba’s annual reports but the actual growth in revenue for the retailers looks to be almost zero (or at the rate of inflation). Plus rural markets could be more price sensitive which also seems to negatively affecting operating margins of overall retail commerce in China.
- On-demand delivery platform and E-commerce expansion internationally – Alibaba does not provide any further breakdown beyond operating margins. At a high level, growth has slowed and has incurred losses to the company.
Although customer management segment has provided with a very stable cash flow, the impact from these other investments have significantly affected their overall margins.
Consolidated Segment Results
| (growth year-over-year) | 2017 | 2018 | 2019 | 2020 | 2021 |
| Revenue | 56% | 58% | 51% | 35% | 41% |
| Core commerce | 45% | 60% | 51% | 35% | 42% |
| China commerce retail | 43% | 55% | 40% | 34% | 42% |
| Customer management | 43% | 44% | 29% | 19% | 24% |
| China commerce wholesale | 32% | 26% | 39% | 24% | 15% |
| International comm. retail | 233% | 94% | 38% | 24% | 42% |
| International comm. wholesale | 11% | 10% | 23% | 17% | 50% |
| Cainiao logistics services | – | – | 120% | 49% | 68% |
| Local consumer services | – | – | – | 41% | 24% |
| Cloud computing | – | 101% | 84% | 62% | 50% |
| Digital media and entertainment | – | 33% | 23% | 21% | 7% |
Segment margins
As we can see overall margins have been decreasing steadily yoy. This is mainly due to decreasing margins of core commerce segment lead by the investments described above.
| 2017 | 2018 | 2019 | 2020 | 2021 | |
| Total Operating Margin | 30% | 27.6% | 15% | 18% | 12.5% |
| Core commerce margin | 54.50% | 48% | 33.7% | 32% | 25.5% |
| Cloud Computing margin | (25)% | (22.4)% | (22)% | (17.5)% | (15)% |
| Digital Media and Entertainment margin | (67)% | (72)% | (83)% | (55)% | (33)% |
| Innovation initiatives | (226)% | (210)% | (256)% | (195)% | (322)% |
Key community metrics
Alibaba’s customer base in China continues to grow steadily at ~14% year-over-year. This signals strong future growth of the company in their core China retail segment.
| (in millions) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Annual Active Consumers (China only) | 423 | 454 | 552 | 654 | 726 | 811 |
| Mobile MAUs (China only) | 410 | 507 | 617 | 721 | 846 | 925 |
| Annual Active Consumers (overseas) | – | – | – | 120 | 180 | 240 |
It is interesting to note that for the past 3 years, 98% of annual active consumers who spent over US$1,000 (RMB6,550) through China retail marketplaces in prior fiscal year continued to spend the same amount in current year as well. This implies that Alibaba has very strong growing customer base.
Annual Highlights
2021
Investments totaling $5.3 billion in six different companies.
Paid $2.8 billion fine for China’s Anti-monopoly law
2020
Investments totaling ~$8 billion in five companies.
2019
Repurchased $1.57 billion of shares.
Launched new retail initiative:
- Freshippo – using retail stores to warehouse and fulfill online orders. 30-minute delivery to customers living within a three-kilometer radius of a Freshippo store.
- Digitizing retail stores under Sun-Art so that orders can be placed on Alibaba’s eCommerce platform and deliveries can be made on their delivery platform.
Investments totaling $5.4 billion in ten companies.
2018
Investments totaling $12.4 billion in twelve companies.
Operating margin of core commerce business dropped mainly due to international retail expansion. This is expected to continue to decrease (hence causing decrease in operating margins) as Alibaba expands eCommerce retail internationally.
Fundamentals
Working capital position
| Value | Median | Industry Median | |
| Current ratio | 1.66 | 1.9 | 1.56 |
| Cash ratio | 1.19 | 1.55 | 0.42 |
| Cash-to-Debt | 3.22 | 2.67 | 0.54 |
| Debt-to-Equity | 0.15 | 0.27 | 0.60 |
| Interest Coverage | 20 | 13.44 | 10.89 |
Management
Alibaba seems to manage it’s inventory and receivable very well as per the numbers below. Days inventory is much better than Amazon’s, but numbers may be skewed because Alibaba derives a significant revenue from customer management (online marketing) which does not deal with physical inventory. Also Days inventory is trending in the wrong direction for Alibaba which I believe is because of international expansion and new retail initiative (both of which have more eCommerce elements and less customer management).
Operating margin has been decreasing for Alibaba in the last five years, which is a very big red flag. In my opinion, this is due the reasons as I had described above.
| 2017 | 2018 | 2019 | 2020 | 2021 | Notes | |
| Operating Margin | 30% | 27.6% | 15% | 18% | 12.5% | Decreasing margin is not good. |
| Days Sales Outstanding (days) | 8.24 | 10.42 | 12.24 | 11.56 | 11.29 | This has increased which is not good, but this is nearly half of Amazon so still pretty impressive. |
| Days Inventory (days) | 9.23 | 11.78 | 15.37 | 18.04 | 18.37 | Increasing trend shows that sales may be slowing, or Alibaba got more inventory and sales may have not been at those levels. |
Above simple tools clue us into general management effectiveness.
Days Inventory – while inventory is considered a current asset, it is expected to be realized in cash within one year. The longer inventory sits around without being sold, the less value it adds to the business, since it could be converted into cash and deployed into more productive uses. High inventory levels also increase the risk obsolescence, require large cash/borrowings to finance, and pose the risk of loss if the market price at which they can sold declines.
Days Inventory indicates the number of days of goods in sales that a company has in the inventory. For comparison, Amazon’s “Days inventory” is 25 days for comparison.
Days Sales Outstanding – measures the average number of days that a company takes to collect revenue after a sale has been made. It is a financial ratio that illustrates how well a company’s receivables are managed. Speedy collection enhances liquidity and can enable its customers to finance its business.
Returns
Returns have been on a steady decline. Returns were abnormally high in 2016 due to revaluation of an equity interest (non-operating income) and gain from disposal of a subsidiary. Returns were lower in 2017 because of high amortization costs from digital contents.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| Return on Equity (RoE) | 27.63% | 39.43% | 17.62% | 19.85% | 20.41% | 23.92% | 17.75% |
| RoE without investment income | 17% | 10.50% | 13.18% | 9.59% | 8.42% | 10.80% | 8.33% |
| Return on Invested Capital | – | – | – | – | – | – | – |
| Return on Asset (RoA) | 13.25% | 23.00% | 9.46% | 10.04% | 9.54% | 12.32% | 9.54% |
| RoA tangible | 15.95% | 29.45% | 12.79% | 13.72% | 13.84% | 17.47% | 12.45% |
Note:
To get a better picture of returns from Alibaba’s core operations, I calculate RoE without investment income and RoA tangible. RoE without investment income removes effects (gains/losses) from non-operating elements and RoA tangible removes intangible assets and goodwill (Alibaba has acquired a lot of intangibles and goodwill from various acquisitions).
Income Analysis
Here we are trying to measure the reliability of earning using quality of income*. This value should be greater than 1 which indicates that earnings are not manipulated, is free of one-time adjustments to net income, and earnings are actually generated from sales and not other sources.
We see the value in 2016 is less than zero because Alibaba had a big gain from disposal of a subsidiary which also increased it’s returns in 2016.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| 1.70 | 0.79 | 1.95 | 2.05 | 1.88 | 1.28 | 1.61 |
Valuation
I have valued Alibaba based on discounted cash flow (DCF) model which discounts free cash flow available to equity holders after all debt and non-equity claims are paid. The discount rate used for this analysis is 9% which is the historic rate of return for S&P500.
Based on my DCF model, fair value for equity at Alibaba comes to $764 billion which is $283 per share. Assuming 5% error, as per my analysis the fair value range should be $269 – $297 per share.
Please note that my valuation only considers operating items and ignores non-operating items like income/(loss) from sales of equity or marketable securities.
Disclaimer
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.
Great blog! So informational
A good detailed financial analysis concluding with fair value.