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Summary of Operations
Alibaba is large, diverse, Chinese company with its own ecosystem of different enterprises it has developed or acquired. Let’s break it down.
Core Commerce (86% Revenue):
Retail Commerce (Taobao and Tmall in China; Lazada, Kaola, and Daraz beyond)
Wholesale Commerce (Lingshoutong in China; Alibaba.com beyond)
Logistics Services (Cainiao and Fengniao)
Consumer Services (Ele.me, Koubei, Fliggy)
Cloud Computing (8% Revenue) : Alibaba Cloud
Digital Media and Entertainment (4% Revenue): Youku, Alibaba Pictures
Innovation Initiatives: DingTalk, Amap
Alibaba illustrates this ecosystem as such:
Several of these assets on their own are highly cash generative, experience high growth rates, have immense customer appeal, and are among the largest commercial platforms in the world. Thus, with a model similar to that of Amazon (also has individually popular enterprises in online and offline retail, shipping, entertainment media), the company offers a wide array of goods and services under a “single roof” that provide economies of scale, cost reduction, and convenience for the customer.
Strategy
Alibaba aims to increase the variety of its product offerings in order to draw in new customers outside of China and to draw more revenues from existing customers. For enterprises it acquires, it integrates them into its vertical operations, internal supply chains, cloud system, data analysis—all of which lead to operational optimization.
With low levels of debt and plenty of its own cash, Alibaba is continually adding to its existing infrastructure and maintains self-sufficiency.
Growth and the Future
Each of Alibaba’s assets are among the most globally popular, reputable enterprises of their kind and are leading the way in China’s and Southeast Asia’s consumer markets. By possessing these in a single ecosystem in developing economies, Alibaba is positioned to enjoy a windfall of cash from a rising middle class in the East. The company has over a billion customers now and aims to achieve 2 billion in the early 2030s.
While there is risk from Chinese regulators cracking down and trade relations with the world being unpredictable, this has always been the case for Alibaba and not impeded its ability to grow. I’ve read annual reports of companies who are limited and at the mercy of regulators in their section on Risk Factors, and this doesn’t seem to be the case here. While everyone is theoretically at the mercy of Xi Jinping in China, even this company, the real question is if he will think it is worth it to smash a player that is bringing his country into a golden age.
Valuation
Even with conservative assumptions, BABA appears undervalued. The company made $26 billion in free cash flow for the year ended March 31, 2021. While financial data for the year ending March 2022 has yet to come in, the current, quarterly data suggests that $20 billion very achievable. The company has been growing around 30% as well, which can’t last forever, but we can price in declining growth.
Growth Assumption: 20% first five years, 15% next five.
Intrinsic Value Per Share: $195
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