Alibaba Stock (NYSE:BABA)
Alibaba (NYSE:BABA) shocks the investment world with some breaking news. The corporation introduced a new organizational structure on March 28 in an effort to increase the responsiveness of its companies to market changes and foster innovation. The strategy calls for forming six significant corporate groups, each with a separate CEO and board of directors. Local Services, Global Digital Business, Cainiao Smart Logistics, and Digital Media and Entertainment are the groups, together with Cloud Intelligence, Taobao Tmall, and Cloud. With the exception of Taobao Tmall, which will continue to be entirely owned by Alibaba Group, these organizations will have the freedom to raise outside funding and perhaps pursue their own IPOs.
After the announcement, Alibaba stock has been erratic as investors evaluate the company and the effects of the split. Previous articles on Alibaba always included a valuation of the company’s operations. Only then can one determine when it’s appropriate to buy a company outright or a portion of it in order to achieve his own desired return on investment? The individual company categories and their valuation will be the main topics of this study. Alibaba, as mentioned in earlier articles, satisfies the criteria for a great company. Notwithstanding the risks involved in investing in a Chinese company, the upside in Alibaba stock may be very high compared to the downside.
The objective of this article is to take a quick glance at each segment’s most recent quarterly performance. With a comprehensive understanding of every component, a valuation may be carried out to provide the reader with the business’s intrinsic value based on the applied assumptions.
Cloud Intelligence Group
Alibaba Cloud and DingTalk are two cloud providers. In terms of revenue, Alibaba is regarded as the largest infrastructure-as-a-service provider in the Asia Pacific region and the third largest globally. The business is also China’s largest supplier of public cloud services. Alibaba Cloud provides a range of cloud services, including IoT, servers, computation, storage, networks, and security. They make advantage of these services to offer their clients solutions tailored to their particular industries to facilitate improved operations and decision-making. Additionally, they provide DingTalk’s solutions to their business clients so that they may enhance teamwork and gain access to big data analytics and AI capabilities. The digital collaboration platform DingTalk offers new ways for businesses and organizations to collaborate.
Alibaba’s Cloud sector generated RMB20,179 million ($2,925 million) in revenue in Q4 2022, an increase of 3% from the same period in the prior year. Although hybrid cloud revenue decreased, the growth was primarily attributable to public cloud revenue’s rapid expansion. The majority of cloud revenue, 53%, came from non-Internet sectors including financial services, education, and vehicles, which also experienced 9% yearly growth. However, income from clients in the Internet sector fell by 4% as a result of a prominent client’s decreased desire for foreign cloud services, which was only partially offset by rising demand from other clients in China’s Internet sector.
Taobao Tmall Business Group on Taobao
As of March 31, 2022, Taobao and Tmall, together making up Alibaba’s Taobao Tmall Business Group, currently known as China’s Commerce retail enterprises, will be the largest digital retail firm in the world. Additionally, Taobao Deals provides consumers with products that are affordable, Taocaicai offers next-day pick-up services for groceries and fresh goods at local pick-up locations, and the company’s direct sales businesses, such as Tmall Supermarket, Freshippo, and Sun Art, upgrade the customer experience by integrating online and offline capabilities. Alibaba’s retail division in China accounted for almost 67% of its revenue in FY 2022. The company has also created a digital commerce infrastructure for its marketplaces and direct sales operations that seamlessly combines online and offline capabilities to provide an improved customer experience. Additionally, 1688.com, the largest integrated domestic wholesale platform in China by net sales in 2021, links wholesale buyers and sellers across a variety of categories.
RMB165,765 million ($24,034 million) was the retail business’s revenue in the fourth quarter of 2022, a 1% decline from the corresponding period in 2021. The lackluster customer demand and continued competition were the key causes of flat revenue, which led to a mid-single-digit fall in the GMV of online physical items produced on Taobao and Tmall. Freshippo and Alibaba Health were two sectors that saw notable growth. The revenue from China’s wholesale business was RMB4,221 million ($612 million) in the same quarter, which was constantly compared to the same period in 2021.
To-Home and To-Destination are two unique scenarios in which the organization uses the internet and mobile technology to enhance customer services. Customers can access merchant services from home, including food and beverage delivery, groceries, and pharmaceuticals, thanks to “To-Home” companies like Ele.me and Taoxianda. Consumers may easily get high-quality services such as navigation, travel services, and local services at their destinations thanks to the “To-Destination” companies like Amap, Fliggy, and Koubei. While giving customers simple access to high-quality services, these services offer targeted marketing solutions, digital operating capabilities, and analytics tools to retailers.
A 6% rise from RMB12,466 million in the same quarter of 2021, Alibaba’s revenue from local consumer services in the most recent quarter was RMB13,164 million ($1,909 million). The boost was principally brought on by the “To-Home” business’s positive GMV growth, which was fueled by Ele.me’s increased average order value.
Global Digital Business Group of Alibaba
To link buyers and sellers around the world, Alibaba’s future Global Digital Business Group runs retail and wholesale companies. Lazada, AliExpress, Trendyol, and Daraz are among the companies in the International Commerce Retail sector. Lazada is a rapidly expanding e-commerce site in Southeast Asia that gives users access to a huge selection of goods. For its customers and retailers, it also runs a solid logistical network. Global customers can make direct purchases from manufacturers and distributors using AliExpress. Using its product sourcing ability and supply chain advantages in Turkey, Trendyol is a prominent e-commerce platform in Turkey that provides a wide range of products and services, including rapid delivery services for food and groceries. In South Asia, Daraz is a top e-commerce site with significant marketplaces in Bangladesh and Pakistan. Also, in the fiscal year 2022, the International Commerce Wholesale division will run Alibaba.com, China’s most integrated international online wholesale platform, which will bring together buyers and sellers from more than 190 nations.
Revenue for the three months that ended December 31, 2022, in the International Commerce Retail business, increased by 26% year over year to RMB14,644 million ($2,123 million). An increase in Trendyol’s revenue was the main factor in this expansion. However, compared to the same quarter in 2021, revenue from the International Commerce Wholesale business remained constant at RMB4,821 million ($699 million).
Cainiao Smart Logistics
With its in-house developed logistics capacity and capabilities, Cainiao offers retailers and customers one-stop logistics services and supply chain management solutions. In order to improve customer experience and efficiency, it also digitizes the entire logistics process using data insights and technology. It provides home self-pick-up lockers, a network of neighborhood, college, and rural village stations, as well as package pick-up services for customers through Cainiao Post. Via its provincial, city, and county-level fulfillment network in China, Cainiao provides merchants with specialized fulfillment solutions. In addition, Cainiao provides support for retailers on global cross-border and international commerce platforms including AliExpress, Tmall Global, and Lazada.
Cainiao generated RMB16,553 million ($2,400 million) in revenue from domestic and international logistics services and supply chain management solutions in Q4 2022, an increase of 27% from the corresponding quarter of the previous year. The development in domestic consumer logistics services and global fulfillment options were the key causes of the rise. Cainiao generated RMB23,023 million ($3,338 million) in total revenue, including services provided to other Alibaba businesses, an increase of 17% from the same time the previous year.
Digital Media and Entertainment Group of Alibaba
In order to provide customers with pertinent content, our digital media and entertainment division makes use of the insights gathered from our proprietary data technology, which is a complement to our commerce operations. While Alibaba Pictures provides a complete platform for content production, promotion, and distribution, Youku and Quark are important venues for the dissemination of digital media and entertainment material. Users can find, consume, and interact with material on our other platforms, such as the newsfeed and literature ones. Through Lingxi Games, we also create, run, and distribute mobile games.
The revenue for the Digital Media and Entertainment segment in Q4 2022 was RMB7,586 million ($1,100 million), a 6% decline from the same period in 2021. Alibaba Pictures’ declining revenue was the leading cause of the revenue loss.
Ant Group
Alibaba owns one-third of the financial technology company Ant Group. Alipay, a mobile and online payment platform with more than a billion users in China, is run by the firm. Ant Group provides a variety of financial services in addition to payments, such as asset management, microlending, insurance, and credit scoring.
With a valuation of over $300 billion, Ant Group was slated to hold the largest initial public offering (IPO) in history in November 2020. Chinese regulators, who were worried about Ant Group’s corporate governance and compliance with regulations, halted the IPO. Since then, Ant Group has restructured its company and worked to address regulatory concerns.
Ant Group was valued at $180 billion by Warburg Pincus in March 2022, which is significantly less than it was prior to the postponed IPO.
Value of Alibaba Business Groups
Based on their projected growth and revenue for FY2023, the Alibaba business groups were valued. The margin of error for revenue-based value is rather large, making it not the most precise method. Regrettably, every group is currently loss-making on an EBITA basis, with the exception of Taobao Tmall Business and Cloud Intelligence. Because of this, it appeared that a revenue-based valuation made the most sense when each business group was evaluated independently. The subsequent projections were made:
According to the most recent Q3 quarterly report, growth for FY 2023 will be the same as growth for the nine months that ended.
The price-to-sales (P/S) ratio for the business groups with the highest anticipated growth over the previous five years was 6.62.
The P/S Ratio of Taobao Tmall Company was valued at 50% of Amazon’s five-year average.
Uber (NYSE:UBER) and Bilibili (NASDAQ:BILI) both received 5-year average P/S ratios for local services and digital media and entertainment, respectively.
The total estimated value of all business sectors is $450.63 billion. An additional $60.0 billion must be added if Ant Group is valued at $180.0 billion and Alibaba owns a third of it. The total comes to $510.63 billion. As previously indicated, a proper margin of safety of 25% should be used due to the higher probable mistake than in discounted earnings models.
Alibaba Group’s total market value, measured as the sum of its component parts, is $382.97 billion, or $143.5 per share. According to this figure, the company is grossly undervalued, which is consistent with the valuations discussed in earlier articles.
Conclusion
The structure of Alibaba has grown over time. When the market demanded more new goods and services, many new components were added. Now could be a fantastic time to give the various business groups more autonomy and to allow them to be led by their own CEOs. The business significantly expanded in size and became very well diversified. This may also be the key driver for the company’s division. Regardless of the causes, this remedy is improving the gloomy atmosphere of the business, and a new era in Jack Ma’s empire is starting.
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