gudvangen

Its tough being a value investor these days when so many promising companies are actually loss making and growing rapidly. How do you analyze a loss making enterprise with no end in sight ? So I wouldn't fool myself in believing I can predict the outcomes for these venture investments inside BABA. But simplest way to look at it is take the core-ecommerce business(include CAINIAO,LAZADA,Aliexpress,TAOBAO,TMALL,1688,etc) and put a multiple on this. Then do your best guess on market value of rest of the businesses. One way is to look at a similar competitor and see its valuation. Lazada competes with Sea Ltd. which is valued at 130B USD. Ele.me competes with Meituan which is valued at 215B USD. Alipay is worth anywhere from 100-250USD depending on if they can get license to run as a financial company with capital and if they don't have to share the proprietary credit scoring data. Cloud is another 50-100B with reasonable P/S figures.BABA cloud serves 80% of chinese corporates and unlike US where cloud services are becoming commodities, in China cloud providers have to first help businesses digitize data and then put it in cloud. Since the cloud services are more customized for each vertical its a much more sticky/moaty business vs american counterparts. So how much is such business worth in future ? I would guess a lot. If you subtract the estimtated value of these investments from BABA's market cap Alibaba looks damn cheap. But you won't be able to come to the same conclusion via doing a DCF or putting a multiple on net income. Just like you won't be able to use PE ratios and justify valuations for Meituan or Sea Ltd. So honestly a simple thought process for buying BABA for the core ecommerce assuming at some point you would be able to spinoff/sell Alipay/Ele.me/Lazada/Cloud Computing at market valuations. If tech bubble doesn't totally crash in the next 5-10 yrs these investments will only get more valuable over time. Although you may not see positive contribution to income statements from these businesses value is still being created(atleast for now) if you trust the comps.

This is just speculation....BABA inflates GMV to 1) Show its bigger market share over competitors 2) Artificially reduce the take rate figures to show CCP that its not misusing the platform powers and making small return.

The 130B figure is net income after all expenses not the core e-commerce. I'll share my valuation math which splits e-commerce and investment valuation soon.

I'm ignoring their adjusted EBITA or whatever useless metric they are advertising and calculating my own core earnings. Two simple way to value it First take core commerce earnings, put a multiple on it and then add value of non ecommence businesses like cloud, ant etc. On that basis BABA looks cheap and that's why I bought it. Hope was that the investments will slowly turn profitable accelerating earnings growth. The trend is still there but now the initiatives like Taobao deals, merchant support, etc is wiping out the earnings gains from those segments. I still own it and haven't made up my mind about what to do next yet.

Economics 101....a business that earns less than it's cost of capital destroys value when it grows. These investments are producing negative returns(atleast for now) so you have to be able to believe/trust that eventually they become profitable and the net present value of these future positive cash flows is worth the investment. Very hard question to answer. Basically you need to believe Alibaba can make money above cost of capital in these low margin investments once it reaches a mature state. But as long as there is so much capital flowing into this area(check what PDD, JD and now Bytedance plans to do) it will be hard to make money here.

BABA is 20% of net worth and I recently piggybacked Munger into it. Its a tough company to analyze just as Amazon was/is. Main reason is that unlike capex flowing through cash flow statement predominant investments by BABA are made via income statement i.e. supporting negative earning new ventures. Some of these are actual investments like Lazada etc. but most are investments to keep its moat intact. They want the taobao/tmall and whatever other apps they can conjure to be ubiquitous ecosystem for purchasing and for this to happen sustainably they have to always be the best service provider.....in terms of time to delivery, number of product offerings, price, etc. Unfortunately capital is cheap and competition intense....so BABA is forced to do whatever stupid thing the competitor does however uneconomical it is.....hence the step towards low margin retail and logistic/supply chain businesses where it loses huge amount of cash. I heard somewhere that you should identify and ditch a growth company as soon as it slows growing because that is when the multiple collapses. I believe BABA appears to be in that stage. For example. people tout the stock because earnings have been growing at +30% clip while PE multiple is close to 20. First of all you need to look under the hood and subtract off investment gains which was 71B in 2020 and 66B in 2021. Also run rate of share based compensation is ~32B/year. After you remove these items the true income is close to 130B for 2021 and 100B for 2020. The golden egg i.e. core advertising/customer management revenue(CMR) grew 24% from 246 to 306 while non CMR commerce revenue increased 65% from 190 to 315B. Most if not all of this non-CMR revenue is loss making which resulted in much smaller change in net income. So till now these growth initiatives have been eating into CMR earnings and hence reducing margins and suppressing earnings growth but that was ok since earnings were still growing at healthy pace because of operating leverage. But in 2022 management is expecting zero earnings growth which means the chase for unprofitable revenue this year is going to totally wipe out the growth from core CMR. Some of this is permanent in terms of eliminating merchant fees. So how much would you pay for a company which is probably going to g row income 0% and is trading at 3600/130 = 28x core earnings ? Yes you can try to do a sum of parts valuation but its almost impossible to do this accurately without any segment level data and when these segments are all deep in red. Price to Sales could be one tool but its a awful....what P/S multiple should one put on logistics CAINOW vs high margin Cloud business ? I have no idea Long story short, competition is killing baba and its forced to give handouts to gain/keep market share.....hardly a sign of pricing power. Or maybe "have blind faith #neversell" type of investing is just not my cup of tea.