Analyst lists a bunch of ways investors are getting Alibaba wrong
Oppenheimer analysts came away from Alibaba’s (BABA) investor day conference with increased confidence, raising their price target from $100 a share to $110 a share in a new note issued on July 6.
Currently, the stock trades at around $79 a share.
At first glance, Alibaba is essentially just the Amazon (AMZN) or eBay (EBAY) of China, allowing businesses to easily sell to consumers online. However, there is a great deal more to Alibaba than Internet retail, and Oppenheimer believes that investors are simply misunderstanding the value of the additional businesses that Alibaba owns.
For one, investors appear to be dismissing Alibaba’s potential 33% stake in Ant Financial, (AFG) one of the most powerful players in the Internet finance industry. Currently, Alibaba receives 37.5% of Ant Financial’s net income before taxes, but they have the option of converting that to a 33% equity stake once the latter goes public. Ant Financial’s most recent capital raise valued the company at $60 billion, which means Alibaba’s stake is worth around $20 billion.
Oppenheimer also believes that investors don’t appreciate Cainiao’s hyper efficient business model. Cainiao is the logistics network that Alibaba uses and owns 47% of. It can currently deliver 40 million packages a day (with a mere 1200 employees), but is aiming to reach 100 million packages a day in the long run. Oppenheimer notes that revenue grew by 229% year over year, while costs grew by 231%. However, the company is still efficient because these seemingly higher costs were driven by very high capex (as the company expands), and the associated depreciation, rather than inherent to its business model.
Lastly, Oppenheimer sees a lot of potential in Alibaba’s AliCloud, its cloud computing unit. While expectations are for 94% average growth over the next three years, Oppenheimer expects 126% instead. Essentially, AliCloud’s revenue will increase by 10x over the next three years. These projections are so high because AliCloud is already the lead cloud computing provider in China, with 62% of the total market share, with diverse customers (small businesses, big businesses, governments) and Oppenheimer sees the cloud computing in general to reach “a tipping point” in China, and grow rapidly.
Oppenheimer also addresses investor concerns over wasteful acquisitions/investments, and counterfeiting. Oppenheimer argues that a lot of these acquisitions and investments are necessary, given how competitive the Chinese Internet space is, but still compromises by subtracting projected M&A spending from their cash flow projections. The analysts also believe that the counterfeiting is simply a legacy problem in China, and that Alibaba is being very aggressive in clamping down on it.
Overall, Oppenheimer believes that the Internet retail business is worth $232 billion, the Ant Financial business $20 billion, AliCloud $43 billion, Cainiao stake $3.7 billion, and investments/acquisitions at $18.7 billion. Therefore, the overall market cap should be $282 billion, which ends up at a value of $110 a share.
Yahoo, the parent company of Yahoo Finance, has an equity stake in Alibaba.
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Rayhanul Ibrahim is a writer for Yahoo Finance.
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