Alibaba (9988.HK) is a $260 billion Chinese conglomerate that wants to spin-off its faster-growing, money-losing units, including its cloud and logistics divisions, to maximise the value obscured by its sprawl. However, valuing these businesses is more art than science, and the boss, Daniel Zhang, may have a better chance of convincing investors of the potential growth of its main shopping business. In this article, we explore the valuation conundrum facing Alibaba and the potential solutions to unlock its hidden value.
Alibaba's Valuation Puzzle
Before the proposed six-way carve-up, Alibaba's market capitalisation was $228 billion, which is 10 times the net profit of approximately $23 billion, estimated by Bernstein analysts for its main commerce unit in the fiscal year to March 2024. This suggests that the market has not attributed any value to its empire that spans various businesses, including food delivery, video streaming, and online travel, as well as investments such as a one-third equity stake in fintech affiliate Ant, and $52 billion of net cash and short-term investments as of December.
Although carving out businesses can help to maximise value, the task of valuing these businesses is challenging. For example, the cloud-computing division is one of the company's more promising ventures, with a significant operating loss of 1.5 billion yuan ($218 million) in the three months to December. Additionally, its logistics unit, Cainiao Network Technology, is targeting a Hong Kong listing this year, with a potential valuation of more than $20 billion, according to Bloomberg.
However, sizing up these businesses' values can be complicated, as publicly-traded peers JD Logistics (2618.HK), S.F. Holding (002352.SZ), and ZTO Express (2057.HK) trade below one times sales. Additionally, determining the headline value of Alibaba's cloud company, which competes with Amazon's AWS (AMZN.O) and Microsoft's Azure (MSFT.O), is tricky, with sell-side analysts' estimates ranging from roughly $40 billion to $88 billion.
Finding Hidden Value in Alibaba
To unlock hidden value, Zhang must redirect investors' attention to Alibaba's commerce operations in China, which account for two-thirds of its total revenue and are the only profitable division. Although crackdowns and Covid-19 lockdowns have impacted growth, the country's reopening and regulatory easing should help restore it.
By focusing on Alibaba's domestic shopping business and using a rough mid-point of 15 times forecast 2024 earnings, between Alibaba's multiple before last week's announcement and its five-year average of 20 times, the business would have a $340 billion price tag. This is roughly 30% more than the company's entire market value as of Wednesday. Therefore, e-commerce could be the key to unlocking hidden value in China's tech giant.
Conclusion
Alibaba's valuation puzzle is complex, with various business units' valuations being challenging to determine accurately. By refocusing investor attention on the company's profitable domestic shopping business and using a rough mid-point between its multiple before last week's announcement and its five-year average, Zhang may unlock hidden value in China's tech giant.