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I am going to walk you through why you are getting the core business of BABA at 6.1x EBITDA, even after the explosive performance on Monday. We have a long way to run as of yet.
Enterprise value (Market Cap + net debt) at end of trading on Monday = $284bn. We are at an annualized Adj. EBITDA of ~$20bn based on the six months ended 2021 (note that this is less than management adj. EBITDA, as I don't add back share-based compensation or operating lease costs when bridging to adj. EBITDA...both are real expenses, never let anyone tell you otherwise).
Together, those give us 284/20 = 14x EV/Adj. EBITDA for the group as a whole. But this misses the bigger picture.
1. The adjusted EBITDA above doesn't include a cent from the BABA investment portfolio, including a 1/3rd stake in Ant financial, which is accounted for by the equity method (slide 10). By the way, they have over 300 distinct investments. Baba’s share in Ant alone was worth ~$100bn exactly one year ago. Say it's now a third of that, and you get the whole investment portfolio for free. That's a $33bn stake.
2. EBITDA multiples ignore valuable yet negative-EBITDA businesses. One example - the Digital Media & Entertainment sector had EBITA of around negative $400mm USD. This segment is predominantly Youku, which has ~60mm active daily users and 350-400mm monthly active users. It's the third largest video site in China and a fifth of SNAP's user base! On our multiple above, it alone subtracts $5.6bn* from the biz. value (*ignoring minimal depreciation here, BABA doesn't report segment-by-segment depreciation). Recall that they actually paid $5.5bn for it in 2014. Mark it at cost. Btw.... do you know any platform social media businesses that you can buy at 2014 valuations? I don't.
3. Alibaba Cloud - a biz with insane operational leverage, meaning profits scale exponentially with revenue. In 2021, they had $12.6bn of annualized revenue vs $64bn for AWS. Q3 saw 31% YoY growth despite losing a key customer. Adjusted EBITA is finally positive, at $115mm. This division is a fifth the size of AWS and almost half of Chinese cloud market share. They have a HUGE runway.
The average Cloud 100 valuation multiple was 34x revenue in 2021, but those grow quite a bit faster than 91%. Call it a 10x ARR for Alibab Cloud and there's $126bn of EV there alone. In our EBITDA multiple approach above, it was only $1.5bn.
4. Lastly, in this analysis we are ignoring that BABA is spending heavily on growth initiatives that depress profitability in the short term, but deliver in the long term. Let’s leave that out.
This is getting long, so let's wrap it up.
ADJ. EBITDA: Group less DME less Cloud less ANT contribution = $20 - 0.14 - 0.40 - N/A (equity accounting doesn't affect EBITDA) = $19.46bn.
Enterprise Value: Group ($284) less DME EV ($5) less Cloud EV ($126) less Ant EV ($33bn) = $120bn.
The core e-commerce group is trading at $120/$19.46 = 6.1x EBITDA.
Average trailing EV/EBITDA ratios for large cap US companies are 15x for communcations, 23x for IT and 23x for Consumer discretionary. No sector is less than 13x. Walmart trades at 16x. Microsoft is 26x. Amazon aggregated is 28x, twice BABA as a group. FB = 18x. eBay, literally the dinosaur of American e-commerce, trades at 8x. I don't know about you, but I haven't "Bought it now!" since 2006.
Baba isn’t a dinosaur quite yet. To those who complain that this might get delisted in the states, I say this…if that ever happens, just transfer your shares to HK. Same same.
This is a great business at a dirt cheap price. It’s a steal at these prices and it’s even more of one at anything beneath it. Personally, I’m thrilled to take advantage of this opportunity.
Anyone else feel like making some real money?$Alibaba(BABA)$ $Alibaba(09988)$