Alibaba is too old for retro financial nonsense

[HONG KONG] There comes a time when technology companies should let go of the past. Alibaba is having trouble doing so, based on some of the retro valuation methodology chief financial officer Maggie Wu trotted out during two days of investor presentations this week in Hangzhou, China. The e-commerce giant is too big and too old for such nonsense.

In some ways, Alibaba's gaze is firmly fixed on the future. Chief executive Daniel Zhang reminded the 600 or so attendees of the company's planned lifespan of 102 years, and the importance of dreaming up ways to kill its own businesses before competitors do. It is looking backwards financially, however.

For the finale of her presentation, Ms Wu estimated that half of Amazon's US$860 billion market cap could be attributed to e-commerce. The division's roughly 400 million customers, excluding cloud services, are therefore worth over US$1,000 apiece. Apply that to Alibaba's 860 million so-called annual active consumers, Ms Wu said, and that's some US$900 billion, or double its current US$450 billion equity value. And that's before factoring in other businesses, including its newly secured 33 per cent stake in fintech behemoth Ant Financial.

Although the math elicited applause, it evokes the sort of creative Silicon Valley thinking popular back in 1999 when Jack Ma started Alibaba, and which was used to assess money-losing startups. For a 20-year-old profitable outfit like Alibaba, though, conventional financial analysis is more appropriate.

To that end, Alibaba is already valued on par with Amazon using traditional approaches. Both trade at about 31 times expected Ebitda. If the Chinese company wanted to spotlight a perceived slight, it could more reasonably point to its faster-growing top line and higher profit margins. The resulting uplift on that basis, though, might be less dramatic.

One reason Alibaba is probably resorting to such fanciful analysis is the US-China trade war, which has whipsawed its shares despite reassurances from the top brass that the company is positioned to benefit from it. More significant is a planned second listing in Hong Kong, where new investors may yet be persuaded to impute a higher valuation. They would be wise to look past Alibaba's defensive hype.

Alibaba chief executive Daniel Zhang said on Sept 24 during an investor presentation that the company aims to serve more than 1 billion annual active consumers and generate over 10 trillion yuan (S$1.93 trillion) in gross merchandise volume from its China consumer businesses in five years.

The company also said on Sept 24 that it had secured approval to receive a 33 per cent stake in payments outfit Ant Financial in exchange for 37.5 per cent of its pre-tax profit, more than 18 months after it first proposed the restructuring. Ant was valued at about US$150 billion in an April 2018 fundraising.

REUTERS