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hello everyone it's davide here and welcome back to learning finance in today's video guys i'm going to talk about alibaba stock so alibaba group ticker symbol baba some people refer to alibaba as the chinese amazon the stock as of now has been going down a lot as we are going to see not because of the business but because of the chinese government okay so is it a buy today what is the fair price of it we are going to do a fundamental analysis about it and we are going to see what's in the fair price of the stock and how far the stock can go between the many investors in alibaba we have ray dalio which as you know is the owner of the biggest edge found in the world and he bought a lot of alibaba stock as we can see from here ray dalio bought around 1 million point 3 shares and around 4.72 of the total portfolio so in this analysis we will understand if today is a buy for us as well or not the only thing i ask you guys is to leave me a like it's very important and early like just now it doesn't cost you anything and you're gonna help me a lot with the channel to reach more people and subscribe to the channel so you don't miss any new updates let's begin all right guys so first of all let's start with the business of alibaba to understand its business and here we have the revenue by segment so alibaba is mainly based on four segments 86 of the revenues it comes from the core commerce which is basically alibaba.com aliexpress everything related with the online market shopping and things like that mainly in china but they have also international stuff like aliexpress then we have the orange here which eight percent is the cloud business so the cloud business of alibaba is growing and growing is the right now is the third in the world then we have the five percent which is digital media and entertainment over there and the one percent the little yellows lies over there innovation so they also invest in new startups and things like that as it is possible to see from here we have the four main businesses now this is chinese money okay but what's important to it is to understand the path and not the money the money we're gonna see later on we can see how the core commerce is growing at a very fast pace as well as the cloud computing which is going parabolic as of now and then we have innovation which is growing as well and the digital media which is flattening a little bit okay anyway the biggest and most important parts of the business are those two so which are growing exponentially so that's very positive this is alibaba revenue from 2010 as we can see from here this graph is incredible they went from a very small amount of money below 1 billion dollars in revenue and they went parabolic as of now the expectations for 2021 and 2022 now here i have two point one thing the alibaba fiscal year is different from uh the u.s companies okay so that's why here we have 2021 and not 2020 2020 for alibaba has already happened because their fiscal years goes from the first of april to the 21st of march okay so this march we had their 2020 fiscal year and now they are already ideally in the 2021 fiscal year so this is why it's shifted but it's the same so the expectation for the next year are 103.99 billions in revenue and then for 2022 138.8 billions in revenue as we can see here the first two quarters that has already happened and we had 21.7 billion in q1 22.8 in q2 in revenues so uh the q3 is expected to be 32.6 so here is very huge expectation because of all the festivities and christmas and stuff the chinese festivities and then q4 26.78 which all together will bring to a total revenue of as we saw before 103.9 when we take a look at the balance sheet so this is the last balance sheet of the last fiscal year just ended the march and we had a revenue of 71.98 billion and here is very important to see that the net margins is very near to 30 so a very efficient business especially if you compare it with amazon which is around five percent here okay so hugely impressive the efficiency of alibaba and when we see the balance sheet we realized that we had total current assets 65.3 billion current liabilities 34.15 gives a current ratio of 1.9 which is very great for a big company like that absolutely no risks of financial distress and stuff very great very solid business even more so when we look at the total assets and total liabilities as the ratio is almost three so very very great this is a wonderful balance sheet for a big business like alibaba there is nothing to worry about and the debt to equity ratio 14.6 however when we deduct uh cash and cash equivalents and cash on hand which is more than 55 billion dollars we have at zero percent as a debt ratio so once again this is absolutely incredible in terms of financials booked to value of just 5.8 amazon is more than 18.
okay so just even because of that we understand the alibaba probably is still very cheap considering its potential now to understand the valuation i have done two types of valuation so the first one free cash flows to equity so discounted free cash flows as always we take the previous in this case six years and we try to estimate the next five years here we have the historical free cash flows to equity here we have the future revenue so expectations and we can see that the first two are the one i've already showed you and then from 2023 to 2025 i have considered four different scenarios 16 growth than 20 than 25 and 27 growth rate we can see that the net margins i took 28 and the average is 34.66 in the previous six years okay so i have been conservative let's see what we got this is the first one the 16 scenario the requirements i took 11 as a rate of return for the equity of alibaba the perpetual growth 3.50 and we get today's company valuation of 766 billion dollars divided by the total amount of shares outstanding that's the fair price today 283 with the 16 scenario which in my opinion is very conservative for alibaba then we have the 20 scenario same requirements uh it gives us today a company valuation of 836.3 billions and a fair price of 309.09 then we have 25 scenario fair price today 344.03 and then the 27 scenario which gives us a two days company valuation of 970.8 billion dollars in the fare price of 358.7 so as we can see from this valuation the company looks very undervalued we are gonna see now a valuation with the p e ratio so here we have i just took the 20 scenario uh so the revenues of the 20 scenario being 2025 guys so here is 2025 and we have 239 billions in revenue as a net margin i have been very conservative here i just took 25 and then the net income you just take the 25 of the total revenues and you have 59.97 billions dollars okay in net income then we have the p e ratio now when we take a look at the historical alibaba pe ratio we realize that the average is around 31 to be conservative i took 29.
you just take the net income you multiply it by 29 and you get the market cap in 2025 which is 1 trillion point seven you divide that by the total amount of shizzle standing in 2025 which i took into account uh dilution so instead of 2.7 billion i say 2.8 billions and you have a share price in 2025 of 621.16 dollars per share we discount this back today at an 11 rate and we have the fair price today with the p valuation is 395.20 per share so once again it looks very very undervalued when we take an average of these prices of five prices we get that the average fare price today is 338 dollars per share today's share price is 260 that would mean a discount as of today of minus 23 percent so 23 discount alibaba today with this evaluation which in my opinion is very conservative so in terms of business alibaba is probably one of the best business out there which is still hugely undervalued in my opinion as we can see from here the stock could at least more than double in the next four to five years so that's a very very great investment in terms of the business itself however what is the problem what is the risk and that and this risk is very common when you invest in china to understand what is the risk of this alibaba itself by also all the businesses in china is that when we look at china as an investment we don't have to look at the chinese environment with a us or european mentality okay because in the us companies they can grow how much they want and it's all always very appreciated okay most of the times as well as in europe we have this more capitalistic mentality in terms of stock market stock prices and the relationship with investors however how in china we we don't have to forget that we have a communist dictatorship okay basically xi jinping is not the most capitalistic man in the world and the chinese government is very very very strong it's stronger than any business the chinese government if they want they can destroy a business without any problems at all okay so why alibaba is today so undervalued because investors they realize the alibaba business is brilliant one of the most efficient out there with an opportunity of growth which is huge considering that china will become inevitably the first economy in the world that's very very incredible however these things can happen so the ad group ipo all of that story why why the biggest ipo in the history has been stopped and that could have happened only in china because as i told you as i just told you it's not a capitalistic world and if you go down this is from market inside a business insider is a very interesting article we realize that this is what can happen in china basically xi jinping has displayed a low tolerance for big private businesses that accumulate wealth and power as they trend his authority okay so the government in china has to be more powerful the older business out there and personalities like jack ma which are basically more like the us mentality okay so to grow a business and become huge like jeff bezos and stuff these kind of personalities are not well accepted by the chinese government because their businesses they can become so big so powerful to actually threaten the authority of the leader so this is the main problem with all the chinese company out there china is not like united states when you invest in a company you just worry about the future growth of the business when we invest in china we have also to to keep in mind that the government is very powerful and the relationship between the government and the sentiment of the government um toward a personality like jack ma for example is very important because it doesn't matter whether the business is actually awesome as we saw like that but it doesn't matter it can be the best business in the world but if the government doesn't like you they they can stop you they can destroy you if they want so that's the main risk with alibaba it's a business which in terms of business itself it's wonderful it's very difficult to find something that powerful in terms of growth out there as big companies okay however this is the risk this is the risk and it cannot be uh avoided so we have to keep that in mind and this is why the stock has dropped basically not because of alibaba itself but because of the government because of the chinese government so we have to keep that in mind as of now the stock is way undervalued because investors they fear these kind of things with the government now in terms of business is alibaba today a buy well yes i bought the stock around 265 i wrote that comment on youtube i don't know if you saw it and it was basically in real time just after i bought the stock in terms of business yes it is a buy you saw the numbers but what i cannot tell you because i am not an expert of this and i have absolutely no idea is how this relationship with the government how these issues that jack ma is having with the government will eventually uh result okay we don't know that and the market doesn't know that as well and this is look once again the stock today is going down again and this doesn't make absolutely sense in terms of business it's just because it is china and that's it that's the main risk guys uh sadly i cannot tell you well don't worry it will be sorted out we'll end up in a good position with xi jinping because i have absolutely no idea terms of business is probably one of the best stocks to buy right now but you you have to keep in mind that and and i i have absolutely no idea how and if this will end up in the good way so that's the main risk guys probably i don't know ray dalio thinks that this situation will end up good that's why he bought the stock is continuing to buy alibaba uh i have a position as well i don't know this could end up as an example if things go well couldn't hand up as the same has happened with facebook and cambridge analytic okay so a huge problem momentarily and then the stock boom continued to go up but it's china so the the real risk is that if they want they can also split alibaba that's just an example okay so that's the risk guys and that's the video so i hope you find this video interesting just leave me a like and write me down below a comment tell me do you think that this situation will eventually be resolved in a optimal way for alibaba or not so i hope you find this video interesting subscribe to the channel and as always guys have a wonderful day
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