Alibaba - Adjusting My Intrinsic Value Calculation

Duration: 5:08 775 transcript words EN summary

Video summary

Alibaba recently reported its earnings, prompting a significant reaction from the stock market and necessitating a re-evaluation of its intrinsic value. The company announced a $10 billion issuance of shares and revealed that while e-commerce grew by 4% and cloud services by 45%, the overall cash flow situation has deteriorated due to massive capital expenditures aimed at artificial intelligence initiatives. Operating cash flow remains positive, but heavy spending on CAPEX has reduced available cash for share repurchases from a previous level of $60 billion down to $30 billion, signaling a shift in strategy away from returning capital to shareholders toward funding high-cost growth projects. The core issue driving the need for adjustment lies in the discrepancy between past promises and current performance, particularly in international e-commerce which is only growing by 1% compared to previous projections. Although management expresses confidence that cloud compute services will double in a few years, the speaker argues that these remain unfulfilled promises rather than realized value creation. Consequently, the earnings per share have declined relative to historical highs, and the company is effectively "burning money" on investments that have not yet delivered the expected returns. This reality contradicts the earlier investor day vision of massive user growth and wallet expansion, leading to a conclusion that Alibaba has failed to deliver meaningful results over the last six years despite its transformation into an AI-focused entity. To address these concerns, the speaker recalibrates the valuation inputs used to calculate intrinsic value, specifically lowering the terminal multiple P/E ratio from 10% to 4% to reflect the current reality of a company that is still fundamentally a retailer rather than a pure tech growth stock. Previously, with seven earnings per share and a high growth rate assumption, the calculated intrinsic value was close to the market price; however, after adjusting for the lack of delivery and the high cost of AI investments, the new intrinsic value drops to approximately half of the current stock price. This drastic reduction highlights that the current market valuation is not justified by the company's actual performance or future prospects under the present conditions. Ultimately, the analysis concludes that investors should not pay a premium for unproven promises regarding deep chips and semiconductors when the underlying business model has stagnated. The speaker emphasizes that without significant growth and a return to higher profitability margins, Alibaba cannot justify its current market capitalization, which stands at $283 billion against an equity value of only $163 billion. While the speaker does not explicitly rule out the company entirely, they advise caution and suggest looking for better investment situations elsewhere, noting that betting on AI alone is insufficient given the five-year period where little tangible progress has been made. The final takeaway is a strong recommendation to reprice the stock downward until it aligns with its actual operational reality and book value.

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Good day, fellow investors. Alibaba reported earnings. It's the stock reacted. It goes up and down a lot in the last year or two, but we have to see how is the intrinsic value, how to adjust that, the P ratio, what is the risk and reward of investing. That's what we do on this channel. They have announced 10 billion [snorts] dollars issuance of shares. That's something. Earnings, if we look at earnings, if you say, "Okay, 9% growth, e-commerce 4% growth, cloud 45% growth, AI 16% growth." Then I look a little bit at the cash flows. 3 billion from operating activities, 9 billion CAPEX leading to 6 and 1/2 billion negative. Cut the share repurchases. The cash that was 60 billion a while ago is going down to 30 billion. Repurchases cut. Huge capital expenditures to grow into AI. I look a little bit at revenue, some specific situations there, but what I'm interested is this, and we'll catch on this later. International e-commerce 1% growth, which is nothing compared to what was promised in the past. Then I look a little bit further. It's all about cloud compute services targeting doubling in a few years. I can give you that. AI, okay. Then I get to my value investing situation. I look at the earnings, earnings per share going down compared to the past on the high investments. And now the question is, "Then, what to use as a valuation input to get intrinsic value of Alibaba?" Well, I looked at the cash for the previous fiscal year, 11 billion provided by operating activities, 17 billion dollars spent. That means negative cash flows. Okay, this is mostly for growth, but I have to adjust it a little bit to the current situation. It was still stable, not much difference there in the cash flows in the this quarter and the first quarter of 2025, but I'm looking at this net income to shareholders fiscal 2026, sorry, 15 billion. I'm looking a little bit as what they are burning at the not that great growth and they are burning money. So, I'm thinking about I used to be 20 billion that the e-commerce was creating, then it went to 15. Now, if I look at what e-commerce is creating with the investments, we are at 10. And then they are spending more at those AI things. So, I have to adjust things a little bit. 10 billion creation, value creation in cash, market cap 283, that's a big P ratio. That's 3.5% of the market capitalization. That means that earnings per share are four, let's say some kind of owner's earnings. I look a little bit at total equity, 163 billion compared to the market cap. It's not the 200 billion we bought big a few years ago and then it was all about buybacks and dividends, not AI. Another situation is that Alibaba hasn't delivered in the last 6 years. And that's what Charlie Munger said, it's still a god damn retailer. Because I looked at the investor day 2021, 2 billion consumers, huge growth there, user growth plus share of wallet expansion, value creation, international was big discussions there. What do we have now? Now, we have highly confident that cloud AI will grow. Promises of growth, deep chips, even semiconductors now. That's Alibaba completely shifting to what they were promising a few years ago, but it's still promises. I don't want to pay for promises in that situation. Therefore, I have to revalue Alibaba. And here we have it. Alibaba, I used to have here I think seven earnings per share, but 10% growth rate terminal multiple P ratio and that it was close to intrinsic value. I'm changing that to four for the situation. Okay, I'm going to leave the growth rate the P ratio and intrinsic value is half of the stock price. Now, they need to grow really big and higher P ratio to justify this. The margin of safety, perhaps not at 33. I will put try to put it here at 60 would be a margin of safety when they reach again the book value. Therefore, I'll put here 45 45 and 10. So, we are still far from not that far from let's say something to look at, but it is something that I have to reprice because it is a goddamn retailer. 5 years nothing happened. Okay, we look for better situations and I'm not going to bet on AI. Thanks for watching. Check my other videos. We did Tencent recently. Check my research platform. I'll see you in the next video.