Intrinsic value of Alibaba Group Holding ADR - BABA

Previous Close

$163.92

  Intrinsic Value

$1,182

stock screener

  Rating & Target

str. buy

+621%

  Value-price divergence*

+1931%

Previous close

$163.92

 
Intrinsic value

$1,182

 
Up/down potential

+621%

 
Rating

str. buy

 
Value-price divergence*

+1931%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of BABA stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 402.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  56.48
  59.50
  54.05
  49.15
  44.73
  40.76
  37.18
  33.96
  31.07
  28.46
  26.11
  24.00
  22.10
  20.39
  18.85
  17.47
  16.22
  15.10
  14.09
  13.18
  12.36
  11.63
  10.96
  10.37
  9.83
  9.35
  8.91
  8.52
  8.17
  7.85
  7.57
Revenue, $m
  22,898
  36,522
  56,263
  83,913
  121,448
  170,946
  234,507
  314,154
  411,753
  528,940
  667,069
  827,186
  1,010,016
  1,215,983
  1,445,234
  1,697,686
  1,973,068
  2,270,981
  2,590,941
  2,932,431
  3,294,942
  3,678,010
  4,081,243
  4,504,345
  4,947,136
  5,409,558
  5,891,687
  6,393,735
  6,916,049
  7,459,115
  8,023,547
Variable operating expenses, $m
 
  22,733
  34,039
  49,876
  71,374
  99,725
  136,130
  181,749
  237,649
  304,769
  383,883
  473,777
  578,494
  696,463
  827,768
  972,362
  1,130,089
  1,300,721
  1,483,980
  1,679,571
  1,887,202
  2,106,607
  2,337,561
  2,579,896
  2,833,508
  3,098,364
  3,374,507
  3,662,058
  3,961,218
  4,272,262
  4,595,545
Fixed operating expenses, $m
 
  1,058
  1,084
  1,111
  1,139
  1,168
  1,197
  1,227
  1,257
  1,289
  1,321
  1,354
  1,388
  1,423
  1,458
  1,495
  1,532
  1,570
  1,610
  1,650
  1,691
  1,733
  1,777
  1,821
  1,867
  1,913
  1,961
  2,010
  2,060
  2,112
  2,165
Total operating expenses, $m
  15,945
  23,791
  35,123
  50,987
  72,513
  100,893
  137,327
  182,976
  238,906
  306,058
  385,204
  475,131
  579,882
  697,886
  829,226
  973,857
  1,131,621
  1,302,291
  1,485,590
  1,681,221
  1,888,893
  2,108,340
  2,339,338
  2,581,717
  2,835,375
  3,100,277
  3,376,468
  3,664,068
  3,963,278
  4,274,374
  4,597,710
Operating income, $m
  6,952
  12,732
  21,139
  32,925
  48,934
  70,054
  97,180
  131,179
  172,847
  222,882
  281,865
  352,055
  430,134
  518,097
  616,008
  723,829
  841,447
  968,690
  1,105,351
  1,251,210
  1,406,049
  1,569,670
  1,741,905
  1,922,628
  2,111,761
  2,309,281
  2,515,219
  2,729,667
  2,952,771
  3,184,741
  3,425,838
EBITDA, $m
  6,952
  14,773
  23,302
  35,260
  51,501
  72,928
  100,449
  134,941
  177,214
  227,976
  287,815
  357,184
  436,396
  525,636
  624,968
  734,355
  853,680
  982,770
  1,121,415
  1,269,391
  1,426,478
  1,592,473
  1,767,208
  1,950,555
  2,142,433
  2,342,820
  2,551,748
  2,769,308
  2,995,651
  3,230,987
  3,475,584
Interest expense (income), $m
  0
  389
  1,020
  1,936
  3,219
  4,961
  7,258
  10,207
  13,903
  18,432
  23,870
  30,280
  37,710
  46,194
  55,752
  66,390
  78,105
  90,884
  104,709
  119,556
  135,403
  152,225
  170,001
  188,713
  208,347
  228,894
  250,353
  272,726
  296,023
  320,261
  345,462
Earnings before tax, $m
  8,685
  12,343
  20,119
  30,989
  45,715
  65,093
  89,922
  120,972
  158,943
  204,450
  257,995
  321,775
  392,424
  471,903
  560,255
  657,439
  763,342
  877,806
  1,000,642
  1,131,654
  1,270,646
  1,417,445
  1,571,903
  1,733,915
  1,903,414
  2,080,387
  2,264,867
  2,456,941
  2,656,748
  2,864,480
  3,080,376
Tax expense, $m
  1,993
  3,332
  5,432
  8,367
  12,343
  17,575
  24,279
  32,662
  42,915
  55,202
  69,659
  86,879
  105,954
  127,414
  151,269
  177,508
  206,102
  237,007
  270,173
  305,547
  343,074
  382,710
  424,414
  468,157
  513,922
  561,704
  611,514
  663,374
  717,322
  773,410
  831,702
Net income, $m
  6,319
  9,010
  14,687
  22,622
  33,372
  47,518
  65,643
  88,309
  116,029
  149,249
  188,336
  234,896
  286,469
  344,489
  408,986
  479,930
  557,239
  640,798
  730,469
  826,107
  927,572
  1,034,735
  1,147,489
  1,265,758
  1,389,492
  1,518,682
  1,653,353
  1,793,567
  1,939,426
  2,091,070
  2,248,675

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  21,817
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  73,322
  82,073
  126,433
  188,568
  272,916
  384,149
  526,983
  705,965
  925,288
  1,188,629
  1,499,033
  1,858,845
  2,269,699
  2,732,546
  3,247,717
  3,815,024
  4,433,861
  5,103,328
  5,822,339
  6,589,733
  7,404,365
  8,265,191
  9,171,332
  10,122,124
  11,117,159
  12,156,310
  13,239,747
  14,367,944
  15,541,684
  16,762,055
  18,030,443
Adjusted assets (=assets-cash), $m
  51,505
  82,073
  126,433
  188,568
  272,916
  384,149
  526,983
  705,965
  925,288
  1,188,629
  1,499,033
  1,858,845
  2,269,699
  2,732,546
  3,247,717
  3,815,024
  4,433,861
  5,103,328
  5,822,339
  6,589,733
  7,404,365
  8,265,191
  9,171,332
  10,122,124
  11,117,159
  12,156,310
  13,239,747
  14,367,944
  15,541,684
  16,762,055
  18,030,443
Revenue / Adjusted assets
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
  0.445
Average production assets, $m
  1,409
  2,264
  3,488
  5,203
  7,530
  10,599
  14,539
  19,478
  25,529
  32,794
  41,358
  51,286
  62,621
  75,391
  89,605
  105,257
  122,330
  140,801
  160,638
  181,811
  204,286
  228,037
  253,037
  279,269
  306,722
  335,393
  365,285
  396,412
  428,795
  462,465
  497,460
Working capital, $m
  12,839
  -3,652
  -5,626
  -8,391
  -12,145
  -17,095
  -23,451
  -31,415
  -41,175
  -52,894
  -66,707
  -82,719
  -101,002
  -121,598
  -144,523
  -169,769
  -197,307
  -227,098
  -259,094
  -293,243
  -329,494
  -367,801
  -408,124
  -450,435
  -494,714
  -540,956
  -589,169
  -639,373
  -691,605
  -745,911
  -802,355
Total debt, $m
  13,271
  29,139
  55,311
  91,971
  141,736
  207,364
  291,636
  397,235
  526,636
  682,007
  865,145
  1,077,434
  1,319,839
  1,592,918
  1,896,869
  2,231,580
  2,596,694
  2,991,680
  3,415,896
  3,868,658
  4,349,291
  4,857,179
  5,391,802
  5,952,769
  6,539,840
  7,152,939
  7,792,166
  8,457,803
  9,150,310
  9,870,329
  10,618,678
Total liabilities, $m
  32,554
  48,423
  74,595
  111,255
  161,020
  226,648
  310,920
  416,519
  545,920
  701,291
  884,429
  1,096,718
  1,339,123
  1,612,202
  1,916,153
  2,250,864
  2,615,978
  3,010,964
  3,435,180
  3,887,942
  4,368,575
  4,876,463
  5,411,086
  5,972,053
  6,559,124
  7,172,223
  7,811,450
  8,477,087
  9,169,594
  9,889,613
  10,637,962
Total equity, $m
  40,767
  33,650
  51,837
  77,313
  111,895
  157,501
  216,063
  289,445
  379,368
  487,338
  614,603
  762,126
  930,577
  1,120,344
  1,331,564
  1,564,160
  1,817,883
  2,092,365
  2,387,159
  2,701,790
  3,035,790
  3,388,728
  3,760,246
  4,150,071
  4,558,035
  4,984,087
  5,428,296
  5,890,857
  6,372,091
  6,872,443
  7,392,482
Total liabilities and equity, $m
  73,321
  82,073
  126,432
  188,568
  272,915
  384,149
  526,983
  705,964
  925,288
  1,188,629
  1,499,032
  1,858,844
  2,269,700
  2,732,546
  3,247,717
  3,815,024
  4,433,861
  5,103,329
  5,822,339
  6,589,732
  7,404,365
  8,265,191
  9,171,332
  10,122,124
  11,117,159
  12,156,310
  13,239,746
  14,367,944
  15,541,685
  16,762,056
  18,030,444
Debt-to-equity ratio
  0.326
  0.870
  1.070
  1.190
  1.270
  1.320
  1.350
  1.370
  1.390
  1.400
  1.410
  1.410
  1.420
  1.420
  1.420
  1.430
  1.430
  1.430
  1.430
  1.430
  1.430
  1.430
  1.430
  1.430
  1.430
  1.440
  1.440
  1.440
  1.440
  1.440
  1.440
Adjusted equity ratio
  0.368
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410
  0.410

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  6,319
  9,010
  14,687
  22,622
  33,372
  47,518
  65,643
  88,309
  116,029
  149,249
  188,336
  234,896
  286,469
  344,489
  408,986
  479,930
  557,239
  640,798
  730,469
  826,107
  927,572
  1,034,735
  1,147,489
  1,265,758
  1,389,492
  1,518,682
  1,653,353
  1,793,567
  1,939,426
  2,091,070
  2,248,675
Depreciation, amort., depletion, $m
  0
  2,041
  2,163
  2,335
  2,567
  2,874
  3,268
  3,762
  4,367
  5,094
  5,950
  5,129
  6,262
  7,539
  8,960
  10,526
  12,233
  14,080
  16,064
  18,181
  20,429
  22,804
  25,304
  27,927
  30,672
  33,539
  36,528
  39,641
  42,880
  46,247
  49,746
Funds from operations, $m
  23,242
  11,051
  16,850
  24,957
  35,939
  50,392
  68,912
  92,072
  120,396
  154,343
  194,287
  240,024
  292,732
  352,028
  417,947
  490,456
  569,473
  654,878
  746,533
  844,288
  948,000
  1,057,538
  1,172,793
  1,293,685
  1,420,165
  1,552,222
  1,689,881
  1,833,208
  1,982,306
  2,137,317
  2,298,421
Change in working capital, $m
  11,621
  -1,362
  -1,974
  -2,765
  -3,753
  -4,950
  -6,356
  -7,965
  -9,760
  -11,719
  -13,813
  -16,012
  -18,283
  -20,597
  -22,925
  -25,245
  -27,538
  -29,791
  -31,996
  -34,149
  -36,251
  -38,307
  -40,323
  -42,310
  -44,279
  -46,242
  -48,213
  -50,205
  -52,231
  -54,307
  -56,443
Cash from operations, $m
  11,621
  12,413
  18,824
  27,722
  39,693
  55,342
  75,268
  100,036
  130,156
  166,061
  208,099
  256,036
  311,015
  372,625
  440,872
  515,701
  597,011
  684,669
  778,529
  878,437
  984,251
  1,095,845
  1,213,116
  1,335,995
  1,464,444
  1,598,464
  1,738,094
  1,883,413
  2,034,537
  2,191,623
  2,354,864
Maintenance CAPEX, $m
  0
  -141
  -226
  -349
  -520
  -753
  -1,060
  -1,454
  -1,948
  -2,553
  -3,279
  -4,136
  -5,129
  -6,262
  -7,539
  -8,960
  -10,526
  -12,233
  -14,080
  -16,064
  -18,181
  -20,429
  -22,804
  -25,304
  -27,927
  -30,672
  -33,539
  -36,528
  -39,641
  -42,880
  -46,247
New CAPEX, $m
  0
  -855
  -1,224
  -1,714
  -2,327
  -3,069
  -3,941
  -4,938
  -6,051
  -7,266
  -8,564
  -9,927
  -11,335
  -12,770
  -14,214
  -15,652
  -17,074
  -18,471
  -19,838
  -21,172
  -22,476
  -23,750
  -25,000
  -26,232
  -27,453
  -28,670
  -29,892
  -31,127
  -32,383
  -33,670
  -34,995
Cash from investing activities, $m
  -11,337
  -996
  -1,450
  -2,063
  -2,847
  -3,822
  -5,001
  -6,392
  -7,999
  -9,819
  -11,843
  -14,063
  -16,464
  -19,032
  -21,753
  -24,612
  -27,600
  -30,704
  -33,918
  -37,236
  -40,657
  -44,179
  -47,804
  -51,536
  -55,380
  -59,342
  -63,431
  -67,655
  -72,024
  -76,550
  -81,242
Free cash flow, $m
  284
  11,417
  17,374
  25,659
  36,845
  51,520
  70,267
  93,644
  122,157
  156,243
  196,256
  241,973
  294,551
  353,593
  419,119
  491,089
  569,411
  653,966
  744,611
  841,201
  943,595
  1,051,666
  1,165,312
  1,284,459
  1,409,064
  1,539,121
  1,674,663
  1,815,757
  1,962,513
  2,115,074
  2,273,622
Issuance/(repayment) of debt, $m
  0
  18,023
  26,173
  36,660
  49,765
  65,628
  84,272
  105,599
  129,401
  155,371
  183,138
  212,289
  242,404
  273,079
  303,951
  334,711
  365,114
  394,985
  424,217
  452,762
  480,633
  507,887
  534,623
  560,967
  587,071
  613,099
  639,228
  665,636
  692,507
  720,019
  748,349
Issuance/(repurchase) of shares, $m
  0
  3,535
  3,501
  2,853
  1,211
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  4,762
  21,558
  29,674
  39,513
  50,976
  65,628
  84,272
  105,599
  129,401
  155,371
  183,138
  212,289
  242,404
  273,079
  303,951
  334,711
  365,114
  394,985
  424,217
  452,762
  480,633
  507,887
  534,623
  560,967
  587,071
  613,099
  639,228
  665,636
  692,507
  720,019
  748,349
Total cash flow (excl. dividends), $m
  5,341
  32,975
  47,047
  65,172
  87,821
  117,148
  154,539
  199,244
  251,558
  311,614
  379,394
  454,262
  536,955
  626,672
  723,071
  825,799
  934,526
  1,048,951
  1,168,828
  1,293,963
  1,424,228
  1,559,554
  1,699,935
  1,845,426
  1,996,135
  2,152,220
  2,313,890
  2,481,394
  2,655,019
  2,835,093
  3,021,971
Retained Cash Flow (-), $m
  -9,324
  -12,545
  -18,188
  -25,476
  -34,582
  -45,606
  -58,562
  -73,383
  -89,923
  -107,970
  -127,265
  -147,523
  -168,450
  -189,767
  -211,220
  -232,596
  -253,723
  -274,481
  -294,795
  -314,631
  -333,999
  -352,939
  -371,518
  -389,825
  -407,964
  -426,052
  -444,209
  -462,561
  -481,234
  -500,352
  -520,039
Prev. year cash balance distribution, $m
 
  19,662
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  40,092
  28,860
  39,697
  53,239
  71,542
  95,977
  125,861
  161,635
  203,644
  252,129
  306,739
  368,504
  436,905
  511,850
  593,204
  680,802
  774,470
  874,033
  979,332
  1,090,228
  1,206,615
  1,328,418
  1,455,601
  1,588,170
  1,726,168
  1,869,681
  2,018,833
  2,173,786
  2,334,740
  2,501,932
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  38,439
  26,420
  34,547
  43,837
  55,454
  69,655
  85,030
  101,026
  116,983
  132,181
  145,666
  157,254
  166,119
  171,837
  174,155
  173,006
  168,512
  160,962
  150,789
  138,535
  124,804
  110,224
  95,402
  80,889
  67,150
  54,548
  43,330
  33,632
  25,486
  18,839
Current shareholders' claim on cash, %
  100
  98.3
  97.3
  96.8
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6
  96.6

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. The company has a strategic partnership with Mattel, Inc. Alibaba Group Holding Limited was founded in 1999 and is based in Hangzhou, the People's Republic of China.

FINANCIAL RATIOS  of  Alibaba Group Holding ADR (BABA)

Valuation Ratios
P/E Ratio 64.2
Price to Sales 17.7
Price to Book 9.9
Price to Tangible Book
Price to Cash Flow 34.9
Price to Free Cash Flow 34.9
Growth Rates
Sales Growth Rate 56.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -100%
Cap. Spend. - 3 Yr. Gr. Rate -100%
Financial Strength
Quick Ratio 10
Current Ratio 0
LT Debt to Equity 27.3%
Total Debt to Equity 32.6%
Interest Coverage 0
Management Effectiveness
Return On Assets 10%
Ret/ On Assets - 3 Yr. Avg. 15.7%
Return On Total Capital 13.5%
Ret/ On T. Cap. - 3 Yr. Avg. 20.3%
Return On Equity 17.5%
Return On Equity - 3 Yr. Avg. 27.6%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 62.4%
Gross Margin - 3 Yr. Avg. 65.7%
EBITDA Margin 37.9%
EBITDA Margin - 3 Yr. Avg. 58.7%
Operating Margin 30.4%
Oper. Margin - 3 Yr. Avg. 29.4%
Pre-Tax Margin 37.9%
Pre-Tax Margin - 3 Yr. Avg. 53.6%
Net Profit Margin 27.6%
Net Profit Margin - 3 Yr. Avg. 43.4%
Effective Tax Rate 22.9%
Eff/ Tax Rate - 3 Yr. Avg. 17.7%
Payout Ratio 0%

BABA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the BABA stock intrinsic value calculation we used $22898 million for the last fiscal year's total revenue generated by Alibaba Group Holding ADR. The default revenue input number comes from 2017 income statement of Alibaba Group Holding ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our BABA stock valuation model: a) initial revenue growth rate of 59.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for BABA is calculated based on our internal credit rating of Alibaba Group Holding ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Alibaba Group Holding ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of BABA stock the variable cost ratio is equal to 65.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1032 million in the base year in the intrinsic value calculation for BABA stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Alibaba Group Holding ADR.

Corporate tax rate of 27% is the nominal tax rate for Alibaba Group Holding ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the BABA stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for BABA are equal to 6.2%.

Life of production assets of 10 years is the average useful life of capital assets used in Alibaba Group Holding ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for BABA is equal to -10%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $40767 million for Alibaba Group Holding ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 2457.23 million for Alibaba Group Holding ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Alibaba Group Holding ADR at the current share price and the inputted number of shares is $402.8 billion.

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COMPANY NEWS

▶ Alibaba Burns More Money on Entertainment Push   [Aug-18-17 12:19AM  Bloomberg]
▶ [$$] Alibaba Cashes In on Data Trove   [12:19AM  The Wall Street Journal]
▶ Gartner's Shen Says Alibaba Has Strong Growth Momentum   [Aug-17-17 11:20PM  Bloomberg Video]
▶ Alibaba beats Street 1Q forecasts   [08:56PM  Associated Press]
▶ Highlights From Alibaba's Earnings Report   [07:03PM  Bloomberg Video]
▶ 3 Growth Stocks for the Long Term   [06:15PM  Motley Fool]
▶ What Happened in the Stock Market Today   [05:08PM  Motley Fool]
▶ Alibaba Tops 1Q Revenue, Earnings Expectations   [01:05PM  Bloomberg Video]
▶ Alibaba's Biggest Businesses Are on Fire   [12:37PM  TheStreet.com]
▶ Online sales drive Alibaba revenue   [11:46AM  Reuters Videos]
▶ [$$] Alibaba Cashes In on Data Trove   [10:40AM  The Wall Street Journal]
▶ [$$] Alibaba: jittery giant   [10:38AM  Financial Times]
▶ Inside JDs Plan To Re-Engineer Delivery   [10:36AM  Market Realist]
▶ Stocks Reverse But This China Giant Stands Tall   [10:23AM  Investor's Business Daily]
▶ Alibaba is popping after earnings   [09:25AM  Business Insider]
▶ Alibaba Sees Huge Growth From the Cloud   [08:45AM  24/7 Wall St.]
▶ Alibaba Shows New Bullish Parameters   [08:37AM  TheStreet.com]
▶ Alibaba Uses Its Shopping Leverage   [08:36AM  Bloomberg]
▶ China is Coming for Alibaba   [07:23AM  TheStreet.com]
▶ What Not to Miss in Alibaba's Earnings   [06:22PM  Bloomberg Video]
▶ [$$] How to Play Alibaba's Earnings   [01:54PM  Barrons.com]
▶ A Millennial's View from Inside China   [Aug-15-17 08:07PM  Zacks]
Stock chart of BABA Financial statements of BABA
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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