Hi I'm Jimmy in this video
we're looking at. Alibaba stock
ticker symbol. BABA, first
for going to look at Alibaba as the
basics of Alibaba his business that
we're gonna dive quickly through
their financials and then we're
going to try to come up with a fair
value for Alibaba stock using this
kind of cash flow and stick around
till the end of the video because
towards the end of the video we're
going to review one of the key
drivers that I found to
Alibaba's stock price and
ultimately our success if we're
considering an investment in Alibaba
stock. OK so let's start with
Alibaba's business.
So all the above his business can be
broken into four main segments.
These are those segments according
to how much revenue they brought in
during twenty nineteen twenty nine
team recently ended for them.
Now clearly their core
commerce division is where most
of the revenue comes from but
some of the other segments are
believed to be our belief that
they're going to be huge
contributors to Alibaba stock
price in the coming years.
Let's start with cloud computing
right now cloud computing accounts
for about 7 percent of 20 19 revenue
so Alibaba's cloud offers
nearly everything that we would
expect from a cloud company.
They have a large scale computing.
They have data storage.
They have security management and
app development.
They have big data analytics they
have machine learning and on and on
and on. They do pretty much
everything. Amazon Web Services does
in the Alibaba cloud is the third
largest cloud company in the world
and the largest cloud company in
China.
And without question this is one
of those places of optimism for
Alibaba much like Amazon Web
Services for Amazon.
It is believed that although this
business segment is not profitable
right now in the coming years this
is going to be a huge driver for
growth.
Okay then we have digital media and
entertainment.
This segment has a lot of digital
entertainment.
They have Alibaba pictures.
They have newsfeeds they have music
they control are you coo
which is the third largest video
streaming platform in China.
And once again this is
one of the points of optimism
for Alibaba and Alibaba
has gone out of the way to gone out
of their way to point out that this
segment is useful beyond just
revenue. This segment allows for
useful data gathering beyond the
shopping habits that they track used
in their core commerce section.
In theory this data allows for
Alibaba to better offer
services and products
that their customers ultimately
want. This is a very efficient way
of. I'm gathering a ton of data
and you'll see that that's a common
theme throughout all of their
business data gathering is huge for
them. Okay now we jump over to the
smallest segment innovation
initiatives and other in this
segment they have things like a map
which provides navigation services
and real time traffic within China
and then they also have dinner
talk which they're interestingly
pronounced ding ding which
is an app that provides services
like text messaging and voicemail
things along those lines.
Okay now into the largest segment
core commerce.
So in this segment they have a few
different business signs that they
operate. They have Alibaba.com
which is a wholesale marketplace
then they have 1688 dot.com.
This is one of the leading business
to business marketplaces in all of
China. Then they have TaoBao
and TMall which are broadly
integrated with each other and
separate at the same time.
So we can picture TaoBao as the
place where we can get any product
and almost anybody can sell
what they want up there.
Then you have TMall which is where
you'd find authorized sellers.
So these sellers are more brand
name sellers and had been
authorized by the platform.
Now I see that the integrated at the
same time because if you live in
China jump on their app and search
for a product any product or the
results from both services are
blended together although it will be
clear which specific
platform is selling that particular
product similar to the Amazon
and Amazon's authorized sellers
along those lines.
Now this is key even
more than it is for Amazon in the
U.S. because Alibaba's platform
is the go to place for shopping
for many of China's one point four
billion people.
Okay. So this brings us to the
financial side of Alibaba's
business. So this is Alibaba
as revenue. Going back to 2012 and
as we could see they've had
fantastic growth.
The green bars our analyst estimates
going out the next couple of years
and it seems like analysts are
expecting continued growth going
forward. Now we switch over to
profits and as we can see
here profits have still been
doing pretty good although they're
not nearly as steady as revenue
ones.
But we may also notice that analyst
expectations once again the green
bars well they expect for
Alibaba's profits to continue to
grow at a fairly rapid rate.
And it's very possible since Alibaba
has a lot of good things going on in
their business right now.
Now I just want to point out these
numbers are in US dollars.
We had a convert to go back to the
different financial statements to
pull down U.S. dollars because if
you go to something like Yahoo
Finance they're not it's not
that it's in their home currency
it's not in U.S. dollars so we've
converted them here.
Now there's another part of
Alibaba's business that we didn't
touch on when we went through the
segments because it's not in there
and it's still key to what Alibaba
does. And that's Alipay.
AliPay is a mobile platform that
has a billion users and
it's a huge platform that has been
a very strong complementary
product to what Alibaba does.
In fact in many smaller cities in
China Alipays introduced first
and then they use that to
get people into the Alibaba retail
platform. So it's much easier
once he's using Alipay.
Now Alipay is actually part
of and Financial which is controlled
by Jack Ma who is also the founder
of Alibaba.
Alibaba recently bought about a
third of and financial now
and financial does much more than
mobile pay.
They offer insurance they do money
management they do loans they have a
lot of different things that they
do.
But the reason it's not in one of
the original segments is because
they don't have to listed there
because they only own 33 percent
of it while they use something
called the equity method of
accounting which only which
requires that they list basically
their portion of the sales
or of the profits on
one line and the income statement
one line in the balance sheet.
That's it. They don't need to list
anything else.
If you're curious to see more about
that type of thing.
Let me know in the comments below
and I'll be sure to do a video on
that type of math
either way. Let's move on to
valuation.
Well there are a few different ways
to value this type of company.
Now I'm a big fan of discounted cash
flow so I thought would be
interesting to use that to value
Alibaba stock.
So this is the results of
the discounted cash flow analysis.
Now I'm going to shorten this time
frame up a bit so we can see it a
bit easier.
But as we could see we're using
a required rate of return of nine
and a half percent.
We're using perpetual growth rate of
two and a half percent and
we end up with a fair value for
Alibaba stock of about one hundred
eighty eight dollars per share.
Now if you're wondering how to do
this type of calculation actually
having more in-depth video
is sort of a step by step guide a
walkthrough on how to perform this
exact calculation.
And have also created an excel
template that lets each of us easily
calculate this type of thing.
If you want a free copy of that
there's a link in the description
below to the web page you just got
to e-mail address and e-mail it over
to you. OK. Let's say that we like
this method of valuing this stock
and we believe that the one hundred
and eighty dollars for Alibaba
stock is a fair value.
Now the first time I did this
calculation I actually
used eight and a half percent
for a for the required rate
of return. And I came up with a fair
value of about two hundred twenty
two dollars per share.
But then I came across a risk
that I think is worth mentioning
here and this is the thing I alluded
to at the beginning of the video
that gets one of the key drivers to
Alibaba stock.
So I added some required rate
of return made at 9 1/2 percent and
a hundred eighty eight dollars.
So this is a chart of Alibaba stock
going back to 2014 when they first
went public.
That's the red line.
And then we have the blue line in
the blue line is the exchange rate
between the U.S. currency and the
Chinese currency.
So we may notice in this time period
right here that the U.S.
dollar was getting stronger.
Well when that was happening Alibaba
stock didn't do all that much.
But then as the dollar began to fall
Alibaba stock really took off
jumping all the way to more than 200
dollars per share.
But then when the dollar rallied
again Well once again Alibaba
stock gave back more than 25
percent of its two hundred dollar
per share price.
And more recently the dollar rose
and Alibaba stock fell once again
and this is one of the issues with
investing in Alibaba stock.
Even though this is a very
impressive company and it's going to
have way more upside
than well at least
I think a bit more upside in a
company like Amazon cinch
since their home market of China is
much larger than Amazon's home
market of the US.
Well if we're going to invest
in a company like Alibaba Well
essentially we're also making a call
on how the currencies are going to
act. And since the trade and tariff
tensions are playing a huge role in
both currencies right now.
Well if we invest in Alibaba
stock today we're essentially
making a call on what we believe
the future of those tensions will
be.
And I know that the underlying
fundamentals of Alibaba stock will
also play a huge role in
the stock price at the end of the
day. But for me there
is a lot of unknowns as far as the
currencies and how reliable
this investment is going to be as of
today. But what do you think.
Do you think Alibaba stock is worth
investing in today.
Am I overthinking this currency
issue. Please let me know what you
think in the comments below.
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Thank you so much for stick with me
all the way end the video and I'll
see in the next video.