What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. If you've been watching our channel for the past few months, you might have noticed that we've been very bullish on chinese e-commerce, giant alibaba. In fact, it's one of the biggest positions in our main portfolio and we think it's perhaps the most undervalued, large cap tech stock today, keep in mind that everything in this video is only our opinion. It is not financial advice, make sure to do your own research and consult with a professional before making any investment decision.

Obviously, the past few months haven't treated alibaba's shareholders kindly with the stock losing almost half its value since its peak in october of 2020., alibaba's share price has been clobbered after the disappearance of the founder jack ma anti-trust concerns and negative sentiment around chinese stocks in general. Following the dd incident, it seems like us, baba shareholders can't seem to catch a break before the us markets opened on september 13th. It was reported that china plans to break up parts of ant financial and is the company behind the payment app alipay, which has over 1 billion users. Alibaba owns a 33 stake in the company.

The news caused alibaba's hong kong listed shares that did more than four percent. By the time the us markets had opened. It recovered somewhat and opened down two percent. So how bad is this news for and financial and what does it mean for alibaba? First off we have to establish what ant financial is and what their relationship with alibaba is.

Ant is best known for its payment, app alipay, which has over 1 billion annual active users and occupies a duopoly along with wechat pay. Alipay was originally founded by alibaba to process payments for its taobao e-commerce website, but it was later spun off as its own company alibaba currently owns a 33 stake in ant in recent years. They've expanded their business into other areas in the first half of 2020. Only 36 percent of their revenue came from alipay, which is represented by the blue portion of the pie.

Chart the single largest segment is now credit tech, which makes up 39 of revenue and grew 59 on a year-over-year basis. This is also the area that the government is concerned about credit tech includes two apps. The first one is huabay, which is integrated with alipay and allows users to borrow money to make purchases. It offers a buy now pay later offering similar to a firm in the u.s.

They also run the app geo buy, which is very similar to huawei. It makes small, unsecured loans to consumers. These two apps have both been incredibly successful as they have taken share from traditional credit cards. This shows the power of the alipay ecosystem.

Once a consumer is using an app for payments, it's very easy to cross-sell additional products to them. Credit tech has been a massive growth driver for amp financial. In 2019, its revenue grew 87 to over 40 billion chinese rmbs. In the first half of 2020 it grew 59 on a year-over-year basis.

Their third largest revenue segment is investment tech. They run a platform which allows alipay users to invest with asset management firms such as mutual funds, which they partner with and earns a commission from the partner asset manager. Whenever a user invests in their wealth management products, their investment tech division is now the largest online investment service platform in china, with over 4 trillion rmb of assets under management similar to credit tech, it benefits from being part of the alipay ecosystem. Their investment tech revenue grew 22 in 2019 to more than 16 billion rmb.

Its growth accelerated in 2020, with a 56 year-over-year increase. Their fourth largest revenue segment is insure tech, similar to investment tech insure. Tech is a platform whereby alipay users can purchase insurance policies from third-party insurance companies and makes a commission on each policy sold through the app. While it only makes up a small portion of their revenue.

It is growing rapidly in 2019, ensure tech revenue more than doubled. In the first half of 2020, it increased 47 year-over-year. The last segment is innovation initiatives and other. This only makes up less than one percent of their total revenue.

It includes their and chain cross-border money transfer service which uses blockchain technology. This venture is in its early days still and is not yet significant to the company's overall financial results. When a consumer applies for a loan on alipay and financial uses, a proprietary credit scoring algorithm to determine if they are eligible for a loan and if so, how? Much the chinese government thinks ant's credit tech platform is becoming too powerful and wants to restructure it. When and financial makes a loan on one of its apps, they don't hold the loan on their own balance, cheating.

Instead, they package it and sell it to a partner financial institution such as a bank, instead of making money from the interest on the loans they make money by charging an origination fee on the loan. The chinese financial regulators are concerned about ant's growing presence in the financial system they're connected with roughly 100 banks in china. This interconnectedness could pose a risk to the financial system if left, unregulated concerns about systemic financial risk played a large part in the suspension of ant financials ipo. Last year after their ipo was suspended, the chinese government forced ant to restructure as a financial holding company and spin off the credit tech division as a new business.

The new business would need to provide its own capital for the loans and put up 4 billion rmb to capitalize a new business and will retain a 50 stake. Other investors, including state-run entities, will put up the remaining capital in the most recent news. The regulators also said that they will have to make separate apps for the consumer lending business. This means that consumers will no longer be able to get loans directly from the alipay app.

This separation of the ecosystem will likely decrease the revenue growth of the new lending business. It's less convenient for consumers to get a loan if they have to use a separate app. These new regulatory headwinds will clearly decrease ant financials valuation when they tried to do their ipo. Last year they planned a valuation of about 300 billion dollars after the ipo was cancelled and the regulatory issues came to light.

The valuation dropped dramatically in march of 2021. Private equity firms that owned stakes in the company estimated a valuation of 200 billion dollars, but it's very difficult to say what the valuation would be if it were publicly traded. The credit tech makes up 39 of their revenue after the restructuring. They will only own a 50 stake.

The new consumer lending entity will hold the loans on its own balance sheet. That is something that ant did not do in the past, but with the business model completely changing, it is very difficult to estimate how much it will be worth. The changes will only impact the 39 of ants revenue made up by credit tech. The remaining 61, which includes payments, investment, tech, insurance and other innovations, will not be directly impacted, so they should still be able to retain the majority of their valuation.

Of course, the important question is: what does this mean for alibaba, which itself owns a 33 stake in ant financial? We have a sum of the parts valuation for alibaba, which you can view for free on the public access portfolio on our patreon page link in description below, based on our assumptions of the revenue, growth and profitability of their core businesses. We think that alibaba could be worth 500 per share by 2026. This represents roughly 200 upside over the current share price of 165 dollars per share. Importantly, our sum of the parts valuation only includes alibaba's internal business, including e-commerce cloud computing, media and innovation initiatives to be conservative.

We didn't give them any credit for their stake in ant. Financial as its valuation is highly uncertain. Alibaba currently has a market cap of 450 billion dollars. If you use the private equity investor's estimate of a 200 billion dollar valuation, alibaba state is worth 66 billion dollars.

That would provide an additional 15 upside over our sum of the parts valuation and based on the current dirt cheap valuation of alibaba. We don't think the stock market is giving them much credit for their ant financial stake anyway. While there are tremendous uncertainties surrounding and financial, it will likely continue to play a major role in the chinese financial system. The recent regulatory developments do not change our long-term bullish view on alibaba, alright, guys that wraps it up for this video.

What do you think about alibaba and ant financial? Let us know in the comment section below: if you enjoy this content, don't forget to hit the like button and subscribe, so you don't miss future uploads as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.