Research Firm Says $104 ‘Conservative Downside’ For Alibaba Shares

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Equity research firm EVA Dimensions is highly enthusiastic about the IPO of the Chinese Internet titan Alibaba Group Holding Ltd (NYSE:BABA). The firm bases its analysis of a company on a proprietary set of metrics related to an Economic Value Added (EVA) framework. The two primary metrics used for analysis are EVA Margin and EVA Growth.

Alibaba has an extremely strong EVA Margin

Andrew Zamfotis of EVA Dimensions points out that Alibaba has the highest EVA Margin of any firm main peer group, with an EVA Margin (economic profit margin) of 36.3%. Facebook and Baidu are tied for second/third place with an EVA Margin of 26.8%.

He also notes that while Facebook and Alibaba have similar levels of operating margin, BABA does it this with a good bit less investments in PP&E and other capital. That said, FB clearly remains the leader in terms of EVA Momentum (incremental EVA growth) at 26.3%. BABA is not, however, too behind the social media behemoth, and has the second highest EVA Momentum at 21.0%.

Upside $130, downside $104?

Alibaba valuation analysis

Zamfotis believes the IPO price severely undervalues Alibaba. He says: “Despite the high level of EVA Margin and EVA growth, the current estimated IPO valuation of $168 billion equates to a Future Growth Reliance (FGR) of 68%. FGR is the % of market value attributable to future EVA. Though 68% is high relative to the overall market, the market places a premium on this high growth, high margin industry. That said, BABA’s FGR is below where Facebook Inc (NASDAQ:FB), LinkedIn Corp (NYSE:LNKD), Google Inc (NASDAQ:GOOG) and Twitter Inc (NYSE:TWTR) were when they went public and is in-line with, Inc. (NASDAQ:AMZN)’s and Baidu Inc (ADR) (NASDAQ:BIDU)’s premium today.”

He also points to Alibaba’s implied annual EVA growth in making his valuation of the firm. He notes that BABA is expected to grow its EVA by around $1.2 billion each year over the next decade. This estimate is just below the company’s $1.3 billion EVA increase last year. To make a comparison, AMZN is priced to grow its EVA by $1.42 billion a year. Given an Alibaba IPO valuation of $168 billion, the market is pricing in sales growth of 15% (10-yr CAGR), which seems rather low relative to the 48% y/y current growth rate. Even assuming a pullback in sales growth (4% long term) and assuming a moderate decline in EVA Margin (10-year CAGR of 25%), EVA still puts up a rather stunning $130 target price on Alibaba.

Finally, Zamfotis presents a “downside scenario” where BABA EVA Margin drops to 25% and sales growth falls to 2%, and where shares would be worth only $104, which would be about an 80% increase from the $68, which the company expects to price shares at.
As always, we advise investors – caveat emptor

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