Wednesday, July 17, 2013

Yahoo - Alibaba Group

So I can't believe it's been more than a month since my last post.  This was not an intended leave or anything like that, time just flew by.  Preparing for the summer, going away and things like that.

Anyway, I do intend to keep posting here regularly.  Hopefully I don't have a gap of an entire month too often.

A lot of things are going on now and there are a lot of things to look at and talk about, but for now I just thought I'd look at Yahoo!, or more specifically, the Alibaba Group.

In the earnings release, there was a new slide that I didn't see before which includes the earnings of Alibaba Group.  These figures have always been disclosed in the 10-Q and 10-K's, but I don't remember seeing it in the earnings slides.

It would seem a little odd that something that has been known and disclosed for a long time suddenly gets noticed because it's on a colorful slide.

Anyway, let's take a look at it:



Let's just zoom up on the relevant table on the left:



So, we know that Alibaba Group is doing extremely well.  We all knew that, of course, but it's now even more known.  It's interesting that analysts are now rushing to up their value of Yahoo! based on an increased valuation for Alibaba Group.  I suppose the market/analysts are responding to what looks like some serious operating leverage kicking in (well, it kicked in last quarter too but people didn't seem to get this worked up about it).  Hopefully, that's real operating leverage (that is sustainable).

Anyway, so let's take a look at this thing.  I posted a couple of years ago how some thought that Alibaba Group was worth $32 billion, and last September YHOO sold some shares back to Alibaba Group validating valuations in the $30-40 billion range.

Since then, people have been talking about $100 billion for the valuation of Alibaba Group, and today I think some are saying it's worth $120 billion.

I really don't have any idea how these things are supposed to be valued, but I decided to take a closer look to see if I can get some sort of feel for it.

Alibaba Revenues and Earnings Trend
First of all, here is the trend of Alibaba Group's revenues, operating earnings and net profit (attributable to Alibaba Group):


So this is remarkable.  Revenues have been growing consistently around 70%/year and it has turned profitable since 2011.

Let's take a closer look at this on a quarterly basis:


This is pretty impressive for sure, and you can see why the market is responding to this.  Operating margin is up to over 50%.  We don't have details on Alibaba's financials, so it's hard to say where margins will be over time.  But if they keep growing revenues like they have been and keep margins in the 30%-50% area, this can be a huge market cap company for sure, no doubt about that.  With real earnings, this is no longer just a pipe dream, dot-com.

This is not so safe to do without knowing more details, but if you annualize the first quarter 2013 (ended March 2013) earnings figure that comes to $2.7 billion.  If you value Alibaba at $40 billion, a figure tossed around not too long ago, that would be less than 15x earnings annualized current earnings, which of course is ludicrous for a profitable business growing revenues at 70%+/year.

Taking this $2.7 billion figure, Alibaba would be worth $54 billion at 20x p/e.  20x would still be way too cheap.  OK, instead of looking at it like this, let's make a table out of this.

Alibaba Valuation: 
                     
                                     Value of                             Value per
P/E     Total Valuation    YHOO stake (@24%)      YHOO share
20x     $54 billion           $13 billion                         $13/share
30x     $81 billion           $19 billion                         $19/share
40x     $108 billion         $26 billion                         $26/share
50x     $135 billion         $32 billion                         $32/share
100x   $270 billion         $65 billion                         $65/share

The value is before any taxes that would have to be paid on a sale.   When Facebook came out, it came out at something like 100x earnings and 27x revenues.  At 100x p/e, Alibaba could be worth $270 billion, or $65 per Yahoo share, which is nonsense.

First of all, I am using a figure annualizing the 1Q net income figure which is not always a good idea.  But on the other hand, this doesn't take into account the 70% revenue growth through the rest of the year.  If they continue to grow revenues and maintain or improve margins, then annualizing the 1Q figure would be too low.  There may have been factors that pushed up margins in the 1Q that may not recur.

But anyway, even taking a valuation like 40-50x, which would seem reasonable (not that a value investor would pay that price!) for someone growing revenues so quickly, this would value Yahoo's stake (pretax) at $26-32/share.

YHOO has agreed to sell half of their existing stake in the IPO, so it seems the longer that takes, the more value YHOO can get.

This is really sloppy analysis, but if we push this out a year and assume revenues keep growing at 70% and margins stay up here at 50%, you can just push up the above valuation figures another 70%.  The potential is just insane.

China Crash
One problem that people seem worried about now is the China meltdown.  One thing to keep in mind is that during the financial crisis, companies like Google, Facebook, Amazon and others kept growing and did just fine; they are in growing businesses taking share away from the old economy so the biggest financial crisis / near depression was barely noticeable in their financial statements through the crisis.

In that sense, Alibaba Group exposure may not necessarily carry the same risk as other China-themed investments.

Conclusion
I really don't have any idea if Alibaba will keep growing at +70%/year, or whether 40-50% operating margins are sustainable.  And I didn't intend to fine-tune intrinsic value of YHOO; I just wanted to see what all the hullabaloo was about and in this case, there does seem to be something there.

I have no idea what the proper valuation for Alibaba is, but from the above table, I actually don't think a $100+ billion market cap is a stretch for Alibaba.

I do still own YHOO, primarily for the reason I stated in previous posts (sum-of-the-parts valuation), although I have lightened up as YHOO rallied a bunch.  But it's amazing how much value is being created here in Alibaba.

Do I have a view on Marissa Mayer?  Not really.  She does seem supersmart and well-liked.  It's really good that morale is up which is really important for companies.  But whether or not she can turn around YHOO is a tough question.  I have no idea.  I lean towards being optimistic and do think she has a chance, but it's a tough, fast-changing industry.  She certainly seems to be more qualified to run YHOO than other recent CEO's (who were not Silicon Valley 'geeks'.  Bartz was a tech industry executive, but from another era and didn't seem to have the hacker cred that seems so important)

Anyway, YHOO is certainly still very interesting and I will continue to watch this.  After looking at this data in this form, I almost wish YHOO wasn't in a rush to monetize some of these assets.  Imagine what Alibaba could be worth in a another couple of years.  But then again, who knows when things turn.


32 comments:

  1. Thanks for the post. Yahoo paid $1B for a 40% stake in 2005 so the tax leakage will be fairly large. I think the struggle most investors have with Alibaba is the incremental profitability. Comparing 1Q:13 to 1Q:12, roughly 86% of incremental revenue dollars flowed through to EBIT.

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    Replies
    1. Yes, tax leakage would be big. Maybe we can get Malone in here and have him figure out a deal so he can use some of his tax losses and Yahoo doesn't have to pay... ;)

      The profits is really incredible at Alibaba. It will be interesting to see how this develops.

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  2. http://blogs.r.ftdata.co.uk/beyond-brics/files/2013/07/Alibaba-market-share.png

    China's emarket

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  3. The turnover of Alibaba last yr is more than the total of turnover gerenerated by Amazon plus Ebay last year. Btw, did you study Yahoo Japan? Someone told me that this is a cash cow as well. I did not follow this stock, but I remember that Softbank was interested in acquiring the stakes on Yahoo Japan from Yahoo.

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  4. The potential at Alibaba is incredible. It's a huge market and getting bigger. Although the dynamics are a little different, this is why some people love BIDU. It's the GOOG over there, and look at the difference in market size (and difference in market caps; even though GOOG is global and BIDU is not).

    Yahoo Japan is a great company. It's like a combination of Google and Ebay and some other things. Ebay couldn't get into Japan because of them; they have a great c2c marketplace.

    If you look at the financials, they are really un-Japan-like with high margins and even, high ROEs (imagine that). So it is a company I looked at on and off over the years, but I don't think it's ever been a particularly cheap stock and the problem was that their growth was tapering off.

    They changed management recently but I haven't looked closely since then. It seems like Yahoo Japan's businesses are mature and they aren't finding areas to get growth going.

    Anyway, Yahoo Japan does have financial reports published in English and their income statement/balance sheets do look great.

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    Replies
    1. Thx. Softbank further increased its stake in Alibaba (33% to 36.7%).

      Delete
  5. While it has run up a ton, Softbank is also interesting based on their stake in Alibaba and Yahoo! Japan, plus the wireless businesses and other Internet businesses they own. Unlike Yahoo!, they plan on holding Alibaba for a longer time period, so if the company can keep growing it could be a better way to play it.

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    Replies
    1. Hi,

      Yes, I looked at Softbank over the years on and off, but what scared me off was that they are now a big, levered cell phone company. Nothing wrong with that, really, but it wasn't an area I was too excited about.

      But it's definitely a way to play.

      Thanks for reading.

      Delete
  6. Where did you find the Q3 numbers? They don't list those in the 10-Ks or 10-Qs? Also, you see the quarterly and yearly numbers don't add up right? On a yearly basis as reported by the Yahoo, Alibaba's operating margin is much lower.

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    Replies
    1. The quarterly figures are lagged by a quarter. I will have to take a look about the quarterly/yearly not adding up. Thanks for reading.

      Delete
    2. But where did you find the Q3 numbers cause they don't list it on their 10Ks and 10Qs?

      Check their latest annual report, operating margin is 17%. You list the following quarterly earnings for 2012: 220,273,-245,642 respectively which sums to 890 which do not correspond to Yahoos yearly net income of 485. I have the same numbers as you, picked from their 10Qs and 10Ks except I can't find Q3 numbers, but the numbers Yahoo list don't add up, unless the Q3 is a very very bad quarter.

      Delete
    3. I have gone through every 10K and 10Q since from the most recent one and back to when they first started reporting Alibaba's numbers in their reports in Q108 and every year they omit the third quarter for some reason, very strange.

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    4. I see your comment about the lag and the numbers are then correct, though I am very interested in where you got the Q3 numbers since Yahoo don't list them?

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    5. I think I interpolated it. I forget exactly, but oftentimes companies will report 1Q, 2Q, 3Q and annual so you have to do some math to get the 4Q figure. 4Q = (Annual - sum(1Q - 3Q)) or something like that.

      Delete
  7. Actually, Yahoo don't report Q3 numbers for Alibaba, check for youself. Check 10Q for third quarter of 2012 released Nov 8 2012: http://files.shareholder.com/downloads/YHOO/2772214458x0xS1193125-12-460641/1011006/filing.pdf

    They report 9 months ended but write 30 Jun 2012 which got me very confused.

    See your point about interpolated it but I just want to very it is the correct number.

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  8. I think the way to find the Q3 number which is the Q4 lagged you do 2012 Annual - 9 months ended 30th Jun which is 4,082,838-2,905,752=1,177,086.

    Then it makes sense. Thanks for clearing that up!

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    ReplyDelete
  10. Hi may I ask where did you get your sources from for period 4Q08 - 4Q10?

    ReplyDelete
    Replies
    1. All the data comes from the YHOO 10Q's.

      Delete
  11. Klebe BH | Brust-anhebenden Push-up Klebe BH wird von 3M
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    ReplyDelete
  12. Hi, I was curious what your thoughts are on the current Alibaba IPO. Thanks!

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    Replies
    1. Hi,

      It looks incredible. What can you say? Growing business in growing market with increasing consumption with increasing share going online, with increasing internet user base, increasing penetration of users etc... Everything just seems aligned in the same direction; UP.

      So this can be a monster IPO. Of course, that doesn't mean one should touch it once it lists. Like any other 'hot' IPO, the facts are well-known so the price obviously won't be interesting to value investors or probably even to GARP investors.

      The only question is if they can sustain this pace into the IPO, if the markets can maintain the valuations that these growers trade at (a lot of the high P/E stocks are crashing these days), and the size of the deal and if the market can absorb it.

      There are other issues, too, but I don't know.

      It can be pretty insane; it will be fun to watch.

      Delete
  13. This is a very informative article. This has highlighted that revenues have been growing consistently and the company is gaining profit.

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  14. I enjoyed reading this, it would be nice to see your current thoughts on this. Thanks

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    Replies
    1. We will know more tonight. It is expected that YHOO will say something about the BABA stake as they said they were working hard on the tax issue. If they come up with an interesting structure, the stock may pop.

      As for YHOO's main business; if it will ever recover meaningfully, I am on the fence on that. I don't know. In some sense, it does seem like Mayer is getting more attention (and criticism) just because of who she is (a star CEO).

      Delete
    2. So now that Yahoo said they will spin off Alibaba shares to shareholders, why is the market not buying up more shares of yahoo since the deal is tax free? If the estimated amount of Alibaba that they have now is close to 40B, it's almost the same market cap as Yahoo.
      Also what did you think of yhoo's earnings

      Delete
    3. Hi,
      I don't know. The market is not giving much credit to the Yahoo business. We have to see more progress there, I suppose. Otherwise the event (spinoff) may actually have to happen for more value to be realized.

      Delete
  15. I was curious about your opinion on Yahoo too. Or spinoffs generally. After reading Outsiders, for some reason, I assumed shares would skyrocket; in this case however, Yahoo is more hang gliding.

    Actually my spinoff question had more to do with what's suppose to happen following announcement. For example, I had a relatively small position in FNF. Which spun off non core assets to a even smaller position in FNFV. And shortly afterwards, FNFV spun off to a minuscule position in REMY. I'm still waiting for something to happen because I'd assume these are good Outsiders capital allocation decisions. But from a practical standpoint, what are investors suppose to do in these situations? Keep the spun off stocks? Sell them? Buy more of the spun off shares to make it a "real" position?

    I'm wondering too because even if, I don't know if FNF is an Outsider type company, but if one were to invest in John Malone or Stiritz, and through the spin offs and such, how would "smart" or "reasonable" investors navigate that? Along with FNF and Yahoo, GE is suppose to spin off SYN, in a way that I don't quite understand how it adds value, as much as it shifts value.

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    Replies
    1. Hi,

      That's a good question. Spinoffs are interesting. I should make a post about that. Apparently, keeping both parent and spun off stock tends to outperform over time. Sometimes it takes a little time before the market starts to reflect it. There is a detailed explanation of spinoffs in Greenblatt's "You Can Be a Stock Market Genius".

      As for what to do, I think you just hold on.

      The problem for me is that when I look at spinoffs these days, many or most don't seem particularly cheap to me. Spinoffs are supposed to be unwanted businesses that get ignored by the market, but these days it seems like it's a popular trade so people jump on them just because it's a spinoff. Share prices spike on announcement of splitups, spinoffs etc.

      So what to do? If you are treating spinoffs as a basket trade, then I guess you can own a bunch of them. But I tend to look at each one and I have to like it; it's cheap, or it's an interesting business spinoff or not etc.

      I would say first read the section on spinoffs in the Greenblatt book and go from there...

      Delete
    2. Woah. Just finished You Can Be A Stock Market Genius. Very interesting. Greenblatt's book should be read with Outsiders. Not surprisingly the story lines crisscross a lot.

      Applied to Yahoo ... it likely will boost post-spinoff parent Yahoo, right? There's no way parent Yahoo trades as a nothing company. And, there's nothing to think about for Spinco, right? It just tracks BABA, perhaps with a slight discount, and that's the whole story with that.

      Anyway, Stock Market Genius is fairly eye opening. I'm still trying to understand a lot of it.

      I know you don't follow FNF, but it literally could be a case study in Stock Market Genius. Or I feel like I just stepped into a spinoff reality TV show. Spun-off tracking stock FNFV just announced some sort of Dutch auction. I know one thing to check is management's participation in the auction. But at the same time, starting from a small position in FNF, to a really tiny spun off position in FNFV, I think I fall more towards the "I have such a tiny position is it worth it to research any of this?" Kind of like when people ignore the rights offering.

      Delete
    3. The funny thing is that usually I buy and hold and these special events might compel a rethinking of the strategy. FNF was originally to play the real estate recovery and also seems like a decently run company. Now with these spun off assets, it wasn't part of the original thesis, is the proper way to think of it as FNF parent as still the buy and hold and the spin off assets as special situations with a finite sell point? You Can Be A Stock Market Genius seems to suggest (despite some regret in not holding long term) that Greenblatt bought with special situation in mind, and sold when that special situation bears fruit short/medium term.

      With Yahoo, I guess it was bought with a special event in mind, or at least with the BABA stake as the motivating factor. Now that it kind of resolving, and at least a great part of it - if there is upside left, via BABA possible appreciation, perhaps some clarity with Yahoo Japan, and better valuation of Yahoo core - will be played out by the end of the year, I don't know what to do with it. I know even the best buy and hold investors don't really buy and hold forever, but I have a hard time shaking that mindset.

      To the extent that professional investors have a leg up, perhaps it's better awareness of exit strategy?

      Delete
    4. That's a really good question. When to sell is a hard one. Yes, it's good to find something and own forever, Bufett-like, but Greenbatt's style is different, whether it's the genius/special situations or the magic formula. For the magic formula, it's kind of easy, I guess, as you keep rebalancing so that you own the most attractive names.

      And for special situations, I agree that Greenblatt would get out once it plays out. But when to sell is a tough question. I was talking to a hedge fund manager not too long ago about it. It's a tough question.

      For me, it would be up to valuation. What else is there to invest in? Is it fully priced or overvalued? Will intrinsic value keep growing over time etc...

      So no easy answers there.

      I totally missed FNF, but there seems to be some interesting things going on there with the spinoff(s) and whatnot.

      Delete