Since Alibaba’s (BABA) IPO in September 2014, we have been adamant about the long-term potential of Chinese e-commerce giant Alibaba. Our fair value estimate of its share price currently sits at $134. Though we expect price-to-fair convergence to happen eventually, it will take some time.
Despite currency and country-specific risk concerns, as well as the recent development of potential tax ramifications of Yahoo!’s (YHOO) spinoff of Alibaba shares and whether ultimately the tax bill would land on shareholders’ laps, the company is currently undervalued, and the firm has just started to turn heads regarding the improvement in its monetization rate.
To us, it will always be more important that a company is undervalued than where it generates its business. Currency and country-specific risks are accounted for within the valuation process, either in a potential reduction of future expected free cash flows, a higher discount rate, or a larger fair value range. The DCF, the discounted cash-flow model, is a wonderful tool. Very few considerations cannot be captured in such a process.
As we stated earlier in May, it wouldn’t make sense for us to say that Alibaba has been a great performer since it peaked at ~$120 per share in early November of last year. But it’s important to note that no stock is a fantastic performer if we measure it from its latest peak (if you think about it, it’s all definitional–the stock has gone down).
Alibaba’s share price has recovered nicely in recent weeks, topping $92 following Bernstein’s outperform rating and price target of $120. The market is finally catching up to our analysis. If you take a read of some of the material from the Bernstein report, you will notice that we have been saying much of the same, or to the same effect, in our 16 page report and various writings concerning the company for some time now. The attention the firm has garnered from the market is partially due to continued momentum of its mobile utilization, which is widely regarded as the most likely source for increased long-term earnings growth at the company.
We’ve been impressed with Alibaba’s total gross merchandising volume (GMV) on its China retail marketplaces for some time now, and its GMV has only increased since the last update of our report. The metric investors follow most closely at the company is its monetization rate. Any upside surprises–even only a few basis points–could cause share prices to jump substantially. However, the firm is not as concerned about this metric; it manages its business for growth in GMV and active buyers. Despite this, other analysts–including those at Bernstein–have recently begun to think that the firm’s mobile monetization rate will catch, if not exceed, its PC rate over the long-term.
Hence the rising share price this past week.
At the end of the day, we aren’t doing backflips over Alibaba’s slight increase relative to our cost basis at the moment. We expected situations like this, and we see similar increases coming in the future. The company remains one of our favorite long-term investment ideas–it has been a holding in the Best Ideas portfolio since its IPO–and for investors seeking non-US exposure, Alibaba is worth considering.
Like so many of our other ideas that took some time to get going, price-to-fair value convergence has just started to begin with Alibaba!