Alibaba: Key Takeaways From Investor Day

On Sept. 23 and 24, China's leading e-commerce giant Alibaba (NYSE:BABA) hosted this year's annual investor day in Hangzhou, China, where the company's senior managers updated investors with Alibaba's latest developments and future plans. The investor day is a good opportunity for investors to understand the business strategies in the coming years. In this article, we will highlight some of the key takeaways that we think are most valuable in understanding BABA's position and potential.

Ambitious 5-year Plan

Overall, BABA gave a very ambitious outlook for the next 5 years. During a live streamed speech, Executive Chairman and CEO of BABA Daniel Zhang told the investors that BABA aims to:

serve over 1 billion annual active consumers and surpass RMB10 trillion ($1.41 trillion) in annual gross merchandise volume (GMV) through China consumer business by the end of fiscal 2024.

Now, given that Alibaba had 730 million annual active consumers from its China consumer-facing business in the 12-month period, and GMV transacted on BABA's China retail marketplaces was RMB5,727 billion (US$853 billion) for fiscal year 2019, this 5-year outlook presents cumulative growth rate of 37% and 75% in active consumers and GMV in the 5-year period. Or, to put it into annual growth, that's about 8% and 15% respectively.

Although the annual growth rate doesn't seem very aggressive, investors should be aware of the size of BABA's business: with more than $850 billion GMV, BABA is already selling more goods than Amazon (NASDAQ: AMZN), US's largest online retailer and Walmart (NYSE: WMT), US's largest retailer combined. Based on the historical financials, BABA's revenue growth rate is roughly 2x-3x of its GMV growth. The 15% GMV growth rate would easily turn into over 30% annual revenue growth.

Ant Financial

Alibaba announced it now owns a 33% of share in Ant Financial, the biggest Fintech unicorn in the world now. During the investor day, the CEO of Ant Financial told the investors that Alipay now has 900 million active users in China and 1.2 billion worldwide users, combined with local wallet partners. These numbers are considered to be amazing, given that WeChat, the #1 social network app in China, has just around 1.1 billion active users. With the penetration of Ant Financial in almost every segment, we believe the company is growing into another dominating giant in consumer finance field, just as BABA did in the e-commerce sector.

Source: Investor Day Presentation

Local Services

Taking ele.me into its overall landscape, Alibaba has built up their local services network with two major components, including ele.me, an online food delivery ordering app, and Koubei, formerly part of Alipay, a Groupon alike online to offline entertainment and leisure activities app. The other two include Amap, an online and mobile map service, and Fengniao, a short-distance delivery service.

Source: Investor Day Presentation

According to BABA, the company is bringing all those companies together to create one Alibaba local consumer services operating system. Just as we discussed in our article on Tencent's WeChat ecosystem, while Tencent is building up its own empire for serving people's everyday life, BABA's local services group is doing just as successfully:

Source: Investor Day Presentation

While e-commerce business is reaching to the slowing part of the growth curve, local services market has much larger potential in terms of driving BABA's growth.

Lower Tier Market

The rise of PinDuoDuo (NASDAQ: PDD) alerted other e-commerce giants such as BABA the importance of the lower-tier markets. Luckily, BABA has realized that and has been focusing on growing in those regions. As CEO Daniel Zhang stated during the investor day, while 85% of Chinese consumers in developed areas shop through Alibaba, the penetration is 40% in less-developed areas, offering a significant opportunity to reach under-served consumers there.

Valuation Framework

During the investor day, BABA also provided a valuation framework where they broke the business sectors accordingly and provided the benchmarks for valuation:

Source: Investor Day Presentation

According to this valuation framework, the consumer facing business generates $17+ billion in adjusted EBITA and $6.8 billion in revenue for enterprise facing business. Using a 27x Price/EBITDA for consumer business, and 8x Price/sales for enterprise business, which are common for respective industry, we got $513.4 billion valuation for these two components:

Source: BABA and AMZN in Price/EBITDA

Source: BABA and CRM in Price/Sales

Adding the $83 billion in fair value of BABA's holdings in strategic investments, we are reaching a close to $600 billion valuation on the whole company. Standing at around $460 billion market cap now, this represents a 30% upside potential from the current share price.

Investor Takeaway

The Investor Day from BABA shows us some valuable metrics and insights from the management that help investors understand the tech giant's future strategies and ambition. Our review on the information from the investor day leads us to believe that the company is undervalued at current share price. Although short term economic slowdown poses some uncertainty on BABA's share price, we are strongly believer on BABA's long term success.

Disclosure: I am/we are long BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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