Summary
This article looks at the valuation of Alibaba shares trading on the Stock Exchange of Hong Kong (Ticker: BABA-SW (9988.HK). The Discounted Earnings Model is used to estimate the share’s Intrinsic Value, Expected Return on Investment, and its Margin of Safety.
Introduction
The past year has been a tumultuous one for Alibaba. Starting with the suspension of Ant Financial’s 37 billion US$ IPO in November 2020, the company has just been hit with one bad news after another. In April this year, China’s Antitrust Regulator slapped Alibaba with a record breaking fine of 18.4 billion RMB for abusing its monopoly position in the e-commerce industry. In recent days, there have been reports that the Chinese Government is considering breaking up Ant Financial’s Alipay online payment app and splitting the loan business into a separate app.All the bad news has culminated in the sharp decline of Alibaba’s share price, which has fallen 48% from its 52 week high of 309.40HK$.
Such a massive correction in one of the best e-commerce companies in the world has certainly attracted the attention of many in the investment community. Legendary value investors Charlie Munger and Monish Pabrai have reportedly invested in Alibaba shares earlier this year. The time is right to have a closer look at the current valuation of Alibaba shares trading on the Stock Exchange of Hong Kong. Discounted Earnings Model is one of many methods for valuing stocks. The procedure is similar to the Discounted Cash Flow model, with the free cash flow being substituted with earnings or net income. One advantage of using this method is that earnings data are easily available from the company’s financial reports.
This article describes the use of the Discounted Earnings Model to determine the Intrinsic Value, Expected Return on Investment, and Margin of Safety of Alibaba shares trading on the Stock Exchange of Hong Kong (Ticker: BABA-SW (9988.HK).