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$BABA Q3 earnings report.
Alibaba is now down 67% from the all-time high in October 2020.
After increased competition, declining margins and regulatory pressures, a pullback in price is certainly justified.
But 67% seems excessive…
$BABA Q3 earnings report.
Alibaba is now down 67% from the all-time high in October 2020.
After increased competition, declining margins and regulatory pressures, a pullback in price is certainly justified.
But 67% seems excessive…
1/
Throughout FY21, $BABA increased their Annual Active Consumers +206m, a 19% increase. Alibaba now has 1.28bn consumers globally.
That total number and growth alone makes a 67% share price decline seem insane. But there is some legitimacy to it.
Throughout FY21, $BABA increased their Annual Active Consumers +206m, a 19% increase. Alibaba now has 1.28bn consumers globally.
That total number and growth alone makes a 67% share price decline seem insane. But there is some legitimacy to it.
2/
Alibaba Cloud now services 25 regions globally.
$BABA projected a ~USD$160bn cloud market by 2025. Their current market share in China is ~37%.
Alibaba Cloud now services 25 regions globally.
$BABA projected a ~USD$160bn cloud market by 2025. Their current market share in China is ~37%.
3/
If $BABA lost some of that market share, down to the 30-32% range, they would be generating ~US$50bn in FY25. Which is about a ~4x from LTM cloud revenue.
Even a conservative multiple on the cloud business in FY25 could be worth more than the current EV of $BABA
If $BABA lost some of that market share, down to the 30-32% range, they would be generating ~US$50bn in FY25. Which is about a ~4x from LTM cloud revenue.
Even a conservative multiple on the cloud business in FY25 could be worth more than the current EV of $BABA
4/
That type of valuation would mean you get the e-commerce biz with 1.28bn annual active consumers for free.
But of course that may be overly optimistic. Cloud growth at the end of FY21 for $BABA is likely ~30% YoY.
That type of valuation would mean you get the e-commerce biz with 1.28bn annual active consumers for free.
But of course that may be overly optimistic. Cloud growth at the end of FY21 for $BABA is likely ~30% YoY.
5/
In Q3, $BABA did beat analyst expectations of non-GAAP EPS growth slightly, but missed revenue expectations.
GAAP EPS was down ~70% YoY, whilst adjusted EPS was down 23% .
In Q3, $BABA did beat analyst expectations of non-GAAP EPS growth slightly, but missed revenue expectations.
GAAP EPS was down ~70% YoY, whilst adjusted EPS was down 23% .
6/
The huge decline in GAAP earnings does seem concerning at first glance, but were impacted by unrealised market losses and impairment charges which together amounted to ~$5bn.
The huge decline in GAAP earnings does seem concerning at first glance, but were impacted by unrealised market losses and impairment charges which together amounted to ~$5bn.
7/
Adjusted EPS is a better number to use in this scenario.
During the time the share prices has declined ~67%, adjusted EPS is down just ~23%.
However increased competition and regulations have led to a much lower multiple for $BABA
Adjusted EPS is a better number to use in this scenario.
During the time the share prices has declined ~67%, adjusted EPS is down just ~23%.
However increased competition and regulations have led to a much lower multiple for $BABA
8/
$BABA now trades at ~12x adjusted EPS. If we back out cash and short term investments it’s getting closer to ~10x EPS.
Regardless of everything else going on, for a company with 1.28b annual consumers growing at 19%, 10x earnings just seems crazy to me.
$BABA now trades at ~12x adjusted EPS. If we back out cash and short term investments it’s getting closer to ~10x EPS.
Regardless of everything else going on, for a company with 1.28b annual consumers growing at 19%, 10x earnings just seems crazy to me.
9/
Margins have continued to decline, but most of that is expected. Partly because of the faster growing aspects of the businesses (cloud, international e-com etc.) being low margin or unprofitable.
Additionally margin pressure comes from competition, tax increases etc.
Margins have continued to decline, but most of that is expected. Partly because of the faster growing aspects of the businesses (cloud, international e-com etc.) being low margin or unprofitable.
Additionally margin pressure comes from competition, tax increases etc.
10/
Essentially an investment in $BABA is a high quality e-com biz that is slowing growth but still very dominant, at a very cheap valuation.. probably a low IRR.
But the main upside depends on Cloud which could lead to huge growth, multiple re-rate and great IRR.
Essentially an investment in $BABA is a high quality e-com biz that is slowing growth but still very dominant, at a very cheap valuation.. probably a low IRR.
But the main upside depends on Cloud which could lead to huge growth, multiple re-rate and great IRR.
11/
At some point the valuation has to justify the risks. The regulatory concerns are very real, although often overstated.
Overall, $BABA Q3 earnings weren’t great, but weren’t bad either. Positives & negatives as expected.
At some point the valuation has to justify the risks. The regulatory concerns are very real, although often overstated.
Overall, $BABA Q3 earnings weren’t great, but weren’t bad either. Positives & negatives as expected.
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