Alibaba Group Holding Ltd (BABA)

[FUNMAN]

Alibaba: The Opportunity Hasn't Been Missed As Shares Have A Long Road Of Appreciation Ahead Of Them And Could Outpace Amazon's Previous Growth


Feb. 23, 2021 9:00 AM ET

Alibaba Group Holding Limited (BABA)AMZN14 Comments9 Likes

Read this article at this link to see all of the charts and highlighted bullet points:

https://seekingalpha.com/article/4407882-alibaba-opportunity-not-missed

Summary
Shares of Alibaba represent an opportunity for long-term growth as my conservative bullish case puts the share price at roughly $2,970.65 by the end of 2030.
The Chinese economy is expected to become the world's largest economy by 2028 and the per capita income is expected to grow by 50% by the end of 2025.
BABA has an average annual revenue growth rate of 45% over the past 5 years and for the TTM exceeds Amazon's gross profit margin and net income conversion.
BABA generates a fraction of AMZN's revenue yet they generate more net income, have better gross profit margins and significantly more equity in the company on the balance sheet.
I am very bullish on BABA's future as I believe this decade will mimic or exceed Amazon's past decade of growth.
The stock market today seems to be fueled by quick spikes and short-term gains. I remember when making 15% return in a year was exciting but in 2020 if you didn't make 15% in a month some people wouldn't be satisfied. Investing is a long-term game -and while there are short-term opportunities in the market many of us still invest for the long-term. If you had the opportunity to go back in time and purchase shares of Amazon (AMZN) at $260.40 on 12/18/12 would you take it? I am a shareholder of AMZN and I wish I had paid $260.40 for my shares. If you had purchased shares on 12/18/12 and held them until today you would have made a 1,248% return on your investment. I believe Alibaba Group (BABA) is in the early innings of their growth story and could replicate AMZN's growth or exceed it over the next 8 years. When you compare the BABA of today to the AMZN of 2012 and 2021 it seems massively undervalued. China's population of 1.44 billion dwarfs the U.S.'s population by 1.11 billion and is set to surpass the U.S's economy by 2028. I think that BABA can be one of the best performing stocks over the next decade and I plan on accumulating shares over the next several years. This is going to be a long-term prediction but I think BABA has the potential to hit $2,970.65 by the end of 2030. I am a current shareholder of BABA, I love their financials, their growth rates and believe today's prices represent an amazing opportunity.

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(Source: Alibaba)

Fiscal year 2021 ending in March is shaping up to blow the doors off of fiscal year 2020
BABA reports in both RMB and USD and I will be basing all of my numbers off of BABA's USD numbers going back to fiscal year 2012 found on the financial section of Seeking Alpha. BABA doesn't run on a calendar year schedule and their fiscal year starts in the June quarter and ends with the March quarter of the following year. In fiscal year 2020 BABA generated $71.97 billion in revenue, $32.47 billion in gross profit and $21.07 billion in net income. Over the first 9 months of fiscal year 2021 BABA has exceeded each of these three categories and there is still another quarter to report for fiscal year 2021. Over the first 9 months BABA's revenue is $78.46 billion or 9% larger than fiscal year 2020, gross profit is $34.68 billion or 7% larger than fiscal year 2020 and net income is currently $23.16 billion and is 10% larger than fiscal year 2020. Using what I consider conservative growth rates BABA could finish fiscal year 2021 generating $96.21 billion in revenue, $41.08 billion in gross profit and $27.02 billion in net income. If this occurs when BABA reports Q4 / fiscal year 2021 results in the end of April or Beginning of May they will have exceeded fiscal year 2020's results by 34% in revenue, 27% in gross profit and 28% in net income. BABA is a $732.27 billion dollar company and these growth rates would be exceptional.



(Source: Steven Fiorillo) (Data Source: Seeking Alpha)



(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

BABA has made remarkable progress on its balance sheet as shareholder value has dramatically increased. At the end of fiscal year 2020 BABA's balance sheet consisted of:

Cash and equivalent $46.66 billion
Short-term investments $4.62 billion
Total cash & short-term investments $51.28 billion
Total current assets $65.36 billion
Total assets $185.38 billion
Total liabilities $62.47 billion
Total equity $122.92 billion
As of BABA's latest report while total liabilities have increased so did each of the key metrics I look for in a company. Currently BABA's balance sheet reads as:

Cash and equivalent $47.82 billion
Short-term investments $22.98 billion
Total cash & short-term investments $70.80 billion
Total current assets $91.57 billion
Total assets $250.51 billion
Total liabilities $86 billion
Total equity $164.51 billion
Over the past 9 months BABA has strengthened its balance sheet and increased the value of BABA for its shareholders. BABA's cash & equivalents increased by 2% while short-term investments grew by 397% bringing their total cash and short-term investments to $70.80 billion which is 38% larger than reported at the close of fiscal year 2020. Over the same time period BABA's total current assets grew by 40% to $91.57 billion and the company's total assets increased by 35% as they exceeded $250 billion. BABA's total liabilities increased by 38% as it fueled the company's growth but the additional $23.53 billion was 36.13% of the $65.13 billion the total assets grew by. At the end of the day BABA increased its total equity by $41.59 billion or 34% which in my opinion is one of the critical pieces of the balance sheet.

Overall the increase in liabilities of $23.53 billion has fueled a tremendous amount of growth for BABA over the last 9 months. When looking at the trailing twelve months (TTM) on the income statement BABA's total revenue has increased by 37% or $26.72 billion since the close of fiscal year 2020. BABA's gross profit increased by 31% or $10.21 billion and their net income has grown by 16% or $3.28 billion. When looking at the balance sheet the total equity has increased since the close of fiscal year 2020 by $41.59 billion or 34% while the total assets grew by $65.13 billion. I think the additional liabilities of $23.53 billion which BABA incurred were completely warranted and has fueled much of its new growth. I am excited to see how these trends play out over the next several years.



(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

When comparing Alibaba to Amazon back in 2012 and present day shares look incredibly cheap
BABA and AMZN are very similar companies as they both operate huge online marketplaces for third party sellers to reach an expanded their target audience, cloud computing and digital media & entertainment. Shares of AMZN were valued at $260.40 on 12/18/12 and today you can buy shares of BABA for $263.59. After comparing BABA's financial metrics to AMZN at the end of fiscal year 2012 and 2020 BABA looks like a complete steal.

At the end of fiscal year 2012 AMZN's income statement read as follows:

Total Revenue $61.09 billion
Cost of Revenue $45.97 billion
Gross Profit $15.12 billion
Total Operating Expenses $14.45 billion
Operating Income $976 million
Net Income -$39 million
BABA's income statement current TTM for fiscal year 2021 reads:

Total Revenue $98.69 billion
Cost of Revenue $56.01 billion
Gross Profit $42.68 billion
Total Operating Expenses $26.30 billion
Operating Income $16.41 billion
Net Income $24.18 billion
The TTM for BABA's total revenue exceeded AMZN's by $37.60 billion or 62% while their gross profit dwarfed AMZN's by 183% or $27.56 billion. BABA generated an additional $15.44 billion or 1,581% in operating income while net income came in at $24.18 billion and AMZN's was -$39 million. BABA had a gross profit margin of 43.2% while AMZN's was 24.8% and a net income conversion ratio to total revenue of 24.5% while AMZN's was -0.1%.

When looking at AMZN's balance sheet at the end of 2012 they had:

Total cash and short-term investments $11.45 billion
Total current assets $21.30 billion
Total assets $32.56 billion
Total liabilities $24.40 billion
Total Equity $8.19 billion
BABA's current balance sheet has the following on the books:

Total cash and short-term investments $70.80 billion
Total current assets $91.57 billion
Total assets $250.51 billion
Total liabilities $85.99 billion
Total Equity $164.51 billion
BABA's current total cash and short-term investments was 518% or $59.35 billion larger than AMZN's at the end of 2012. BABA has $250.51 billion worth of total assets on the books which is 669% larger than AMZN and their total equity was $156.32 billion or 1,908% larger than AMZN's. Just by the numbers if I had to pick AMZN in 2012 or BABA of today to hold for the long-term at the $260 range I would invest in BABA.



(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

I can't travel back in time and buy AMZN at the end of 2012 when it was trading around $260 per share so how does the company AMZN has become compare to BABA at around the $260 price point? Keep in mind I am a shareholder of both companies and I am bullish on both. From an income statement perspective AMZN ended fiscal year 2020 with:

Total Revenue $386.06 billion
Cost of Revenue $233.31 billion
Gross Profit $152.76 billion
Total Operating Expenses $129.86 billion
Operating Income $22.90 billion
Net Income $21.33 billion
BABA has generated for the TTM in fiscal year 2021 which covers the same time period as AMZN's 2020 fiscal year the following:

Total Revenue $98.69 billion
Cost of Revenue $56.01 billion
Gross Profit $42.68 billion
Total Operating Expenses $26.30 billion
Operating Income $16.41 billion
Net Income $24.18 billion
AMZN generated $287.38 billion or 291% more in revenue than BABA did while booking $110.08 billion (258%) more in gross profit. AMZN's operating income was also 40% larger than BABA's as they generated an additional $6.49 billion. The interesting thing is that AMZN generated an additional 291% in revenue and 258% gross profit but they booked 12% less in net income than BABA did as BABA generated $2.85 billion more in net income. BABA had better metrics in converting Revenue to the bottom line. BABA has a 43.25% gross profit margin off the revenue they generated while AMZN had a 39.58% gross profit margin. BABA also converted 24.50% of its revenue to net income while AMZN only converted 5.53%. At the end of the day BABA generates about 1/4th the revenue than AMZN but they actually make more money than AMZN does and their margins and conversion rates are better.

When looking at AMZN's current balance sheet they had:

Total cash and short-term investments $84.40 billion
Total current assets $132.73 billion
Total assets $321.20 billion
Total liabilities $227.80 billion
Total Equity $93.40 billion
BABA currently has the following on their current balance sheet:

Total cash & short-term investments $70.80 billion
Total current assets $91.57 billion
Total assets $250.51 billion
Total liabilities $86 billion
Total equity $164.51 billion
On AMZN's balance sheet they had $13.60 billion (19%) more in total cash & short-term investments than BABA while having $70.69 billion (28%) more in total assets. AMZN did have an additional $141.80 billion (165%) in total liabilities than BABA did but I would expect AMZN to have more in liabilities as they created 291% more in revenue and have an additional $70.69 billion in total assets. From a shareholder perspective the very interesting metric is that AMZN has more assets, generates more revenue and gross profit but once again they come up short in total equity the same way they did with net income. Net income and total equity are two of the most important numbers on the income statement and balance sheet in my opinion. BABA currently has $71.11 billion (76%) more in equity on the balance sheet than AMZN does.

I am a shareholder in both companies and from a shareholder's perspective if I was going to increase my position in one of these companies it would be BABA at today's metrics. I see more value in BABA's shares as they are converting more net income from their generated revenue and there is an additional $71.11 billion in equity on BABA's books.



(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

Looking at some forecasts for China's economic growth and Projecting BABA's future growth potential
China's economy has been experiencing significant economic growth and the trend is projected to continue. By the end of 2025 China is on pace to overtake 56 countries in the world's per capita income ranking as they could join the top 1/3rd of nations. The overall living standards in China will be one of the quickest to accelerate thru 2025 as it is projected that the per-capita GDP adjusted for purchasing power will increase by 8.8X from 2020 - 2025.

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(Source: Bloomberg)

The per-capita income in China is expected to grow by roughly 50% from 2020-2025. China's average economic growth has been projected to increase at a rate of 5.7% from 2021-2025 then slow to 4.5% from 2026-2030. By 2028 China is expected to overtake the U.S as the world's largest economy. The World Bank has indicated that China has lifted more than 800 million people out of poverty over the past decades and China has vowed to lift the last 5.51 million rural poor out of poverty. An analysis by McKinsey predicted that by the end of 2022 the Chinese middle class could expand to 550 million people which is larger than the entire U.S population. These metrics work well for BABA because when you have increased standards of living, increased spending power and increased per capita income, theoretically there will be more spending per family / household in China sequentially YoY. I would speculate that as the Chinese economy grows and the per capita income increases BABA could experience increasing growth rates in income and gross profit.

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Over the past 5 years which includes the TTM for fiscal year 2021 BABA has increased its annual revenue by $75.70 billion or 329%. BABA's 5-year average annual revenue growth rate is 45% with a dip to 28% in Fiscal Year 2020 then an increase to 37% for the TTM. For the past 3 years BABA's gross profit margin has averaged 45% while gross profit had an average annual increase of 34% over the past 5 years. BABA's net income has a 5-year average growth rate of 25% and an average conversion rate from revenue of 26%.

Without taking the metrics from China's economy into consideration it's possible BABA could generate an annual revenue of $351.70 billion in five years from now which is an increase of 164% or $218.47 billion from the current TTM. For the current TTM BABA's revenue growth rate was 37% and in this scenario I decreased the growth rate sequentially down to 24% over the 5-year period. Using the same methodology if I expand the timeline out over a 10-year period with the annual revenue growth decreasing to 13% BABA could have an annual total revenue of $776.31 billion which would be an increase of 483% or $643.09 billion from the current TTM. Over the past decade BABA has never converted less than 23% of its total revenue to net income and has a 5-year average of 26%. If we drop the net income conversion rate to 22% BABA would convert $77.37 billion of its $351.70 billion in total revenue in 2025. Using the same 22% if we go out to the potential $776.31 billion generated in 2030 BABA would convert $170.79 billion into net income.

AMZN currently generates $386.06 billion in revenue and $21.33 billion in net income while having a market cap of $1.68 trillion. If my projection holds up and BABA generates $351.70 billion in revenue and $77.37 billion in net income it should at the very least command the same valuation as AMZN. If BABA did its market cap would grow by 135% or $964.47 billion. This isn't taking into consideration the additional net income BABA would have generated and just looking at the valuation based on total revenue. This would put a share price on BABA of $618.89 in the next five years. In my projection BABA's revenue would increase by 121% again over the 5-10 year mark in the projection adding another $424.61 in annual revenue and its net income would grow by $93.42 billion or 121%. If this growth warranted a 100% increase in valuation BABA's market cap would grow to $3.36 trillion with a share price of roughly $1,237.77.

One of the common outcomes of making more money is that you spend more money. China's per capita income is expected to increase by roughly 50% by 2025 and China is expected to have the largest economy by 2028. These trends should increase BABA's growth rates. As more Chinese citizens join the middle class and improve their living standards I would think that a portion of the items and services purchased would come from BABA's platforms. It's hard to project the impact that an expanding economy will have on BABA but if you look at the U.S, the median household income increased from $50,000 in 2012 to $68,400 in 2020. This was an increase of $18,400 or 36.8%. Over the same time period the average household income increased from $69,662.64 to $97,973.61 which is an increase of $28,310 or 41%. As the U.S saw its household income increase AMZN saw its revenue increase from $61.09 billion in 2012 to $386.06 billion in 2020.

BABA's previous revenue growth rate never fell below 27%, the five year annual average revenue growth rate was 45% and over the past 2 years it has increased from 28% to 37%. Based on what has occurred with AMZN and the projections about the Chinese economy I don't think it's out of the realm of possibility for BABA to maintain an average annual growth rate of 27% through 2030. Hypothetically if this was to occur BABA would generate $326.05 billion in revenue for fiscal year 2026 which is an increase of $227.36 billion (230%) and $1.08 trillion which is an increase of $978.51 billion (992%) in fiscal year 2031. This is only a hypothetical but what type of multiple would this deserve especially with BABA's net income conversion rate. If I apply the same multiple as I did illustrating a $1,237.77 share price BABA's market cap would grow to roughly $8.06 trillion with a share price of $2,970.65. This would be an increase of 1,027% by the end of fiscal year 2031 or March 2031.

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(Source: Alibaba)

Conclusion
No one can predict the future and we need to make decisions based on the information we have. I believe BABA's valuation today represents an opportunity for long-term growth. BABA has fantastic margins and growth rates and there is no sign of them slowing down anytime soon. The Chinese economy is expected to become the world's largest economy by 2028 and the average standard of living is increasing rapidly as more people move out of poverty and join the middle class. Based on my projections BABA could under its normal circumstances reach a market cap of $3.36 trillion with a share price of $1,237.77 by the end of 2030. After factoring in the projected expansion in the Chinese economy and a conservative impact it may have on BABA their market cap could grow to $8.06 trillion with a share price of $2,970.65 by the end of 2030. If this was to occur and BABA reaches either of these projections that would be a positive return of 370% - 1,027% on your investment. I am a current shareholder of BABA and AMZN and I am very bullish on both companies. I think BABA represents more opportunity at today's valuation and I plan on adding to my position.