Alibaba: The Christmas Rout Brought A Risk/Reward Gift For Bold Investors

Table 1 – Snapshot figures for Alibaba at year end (31 March 2018)

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(Source: Alibaba’s SEC filings)

Looking at margins, Alibaba has a profit margin above 25% and a gross margin close to 57%. That has been recurring and reveals a powerful business model. Additionally, looking at table 2, it becomes evident that commerce is the main contributor to the revenues.

Table 2 – Income Statement as a percentage of Revenue

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(Source: Alibaba’s SEC filings)

A bit like Amazon (AMZN), Alibaba is also trying to explore other areas as cloud computing, digital services, and entertainment. But, commerce is still the engine of the company. Bear in mind that, for online retailers, having cloud computing and artificial intelligence assets is vital to have a good run operation. It makes only sense that, once you have the infrastructure, you try to derive revenue out of it.

Be as it may, for our purpose, Alibaba fits our search for a pure play on the Chinese online retail. Alibaba is very well positioned to benefit from secular trends in e-commerce. The 17.5% return-on-equity speaks volumes on behalf of the company’s business model robustness. The current ratio at 1.89 and a low debt-to-assets ratio around 18%, comply with a deleveraging macroeconomic scenario for the Chinese economy.

Scenario analysis for Alibaba valuation in 2020

Starting from the macro scenario above, it is reasonable to expect high double-digit growth in revenues. The company still predicts around 50% revenue growth for FY2019. Additionally, we expect the business model to remain robust, maintaining the current profit margin level. That’s the central scenario and, in our opinion, the most likely one.

Additionally, to provide some color, we also include one pessimistic and one optimistic scenario.

Table Scenario analysis for Alibaba’s valuation (USD to CNY at 6.88)

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(Source: Author’s calculations)

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