There are a few ways to determine which e-commerce company in the world is the biggest, by revenue, market capitalization or gross merchandise volume (GMV). GMV refers to the total value of all items sold on the online platform.
Alibaba has just surpassed the milestone of USD 1 trillion in GMV for this financial year ended 31 March 2020, and is undoubtedly the biggest e-commerce company by this measure, far ahead of Amazon in second place.
Does this mean one should definitely buy Alibaba since growth of e-commerce is slated to continue its high growth trajectory?
Please refer to our article on Alibaba Share Price for some initial understanding of the company and I will provide some updates here as it has just announced their latest quarterly results.
Affected By Pandemic
For the January to March 2020 quarter, Alibaba has also been affected by the pandemic as China went into lockdown and closure of businesses. It is important to note strong recovery reported in April as lockdown measures eased and this continued to improve in May.
For the full financial year, even with the setback in the last quarter, we have seen stellar performance. Revenue increased 35% YoY from RMB376,844 million to RMB509,711 million. Many companies choose not to provide financial guidance moving forward because of uncertainties caused by the pandemic, including company like Apple but Alibaba has been confident enough to project that revenue for FY 2021 could reach RMB650,000 which is a 28% growth.
Let’s analyze the profitability of Alibaba. Net margin for the year is 29%, in fact an improvement of 23% from the previous year despite continued investments into growth areas like cloud computing and other business opportunities. Free cash flow remains strong as well at 26% of revenue .
Using DCF valuation, the intrinsic value can be safely $240. The share price is about $200 now, so it can be a buying opportunity with 17% Margin of Safety.
Alibaba has a total annual active consumer base of 960 million globally. Of this 780 million comes from within China while 180 million is number from outside China. To me, Alibaba should continue to do well in the China market while competing against say JD.com and Pinduoduo. It is crucial that Alibaba continues to grow its overseas market as well. Post-Covid19, Alibaba is well poised to leverage on greater digital adoption and transformation.
Cloud computing revenue now forms 8% of Alibaba’s revenue. This grew a whopping 62% YoY. According to Gartner (April 2020), Alibaba Cloud is the largest cloud computing service provider in the Asia Pacific region. The cloud computing line of business currently does not contribute to profits as yet and if this continues to do well, I will be very excited how it contributes to the bottom line. Amazon’s cloud computing business is about 10% of its revenue but 50% of its operating income!
I am overall positive about the stock to be part of my portfolio. US senate has recently passed a bill and potentially some China companies could be delisted from the US stock exchange. Of course, this still has to go the house and President to be signed into law. The good thing is Alibaba is concurrently listed in Hong Kong.
I will be organizing a Webinar on 29th May Friday at 8 pm to share the detailed analysis of Alibaba as above plus a few other growth stocks. Do register soon, early bird registration is FOC.
At Journey With Money, we are practitioners of Value Investing for Singapore and US stocks. We are passionate about sharing our Stock Investment knowledge and experience but the materials we present do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.
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