Intrinsic Calculation For Alibaba Group Holding Limited (NYSE:BABA) Shows Investors Are Overpaying
In this article I am going to calculate the intrinsic value of Alibaba Group Holding Limited (NYSE:BABA) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in March 2018 so be sure check the latest calculation for Alibaba Group Holding here.
Crunching the numbers
I will be using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off, I pulled together the analyst consensus forecast of BABA’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 11.91%. This resulted in a present value of 5-year cash flow of CN¥552.19B. Want to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how BABA’s top and bottom lines are expected to move going forward, which should give you an idea of BABA’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes CN¥1.87T.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥2.42T. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $148.68, which, compared to the current share price of $200.28, we see that Alibaba Group Holding is quite expensive and not available at a discount at this time.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For BABA, I’ve put together three key factors you should further examine:
Financial Health: Does BABA have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does BABA’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of BABA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
