1. Introduction
Lifestyle changes and the pandemic that restricts people's activities in the public area, including shopping and visiting groceries store, require a solution. E-commerce is a breakthrough that meets the expectations of modern society in exchanging goods and services. E-commerce reforms conventional trade where direct interactions buying and selling can be done indirectly through a platform supported by smartphones and the internet.
International Journal of Business and Economy (IJBEC) eISSN: 2682-8359 [Vol. 4 No. 2 June 2022]
Journal website: http://myjms.mohe.gov.my/index.php/ijbec
VALUATION OF E-COMMERCE INDUSTRY BY RELATIVE VALUATION: CASE STUDY AT PT.
BUKALAPAK
Raisa April Lena1* and Zuliani Dalimunthe2
1 2 Faculty of Economic and Business, University of Indonesia, Jakarta, INDONESIA
*Corresponding author: [email protected]
Article Information:
Article history:
Received date : 15 June 2022 Revised date : 18 June 2022 Accepted date : 27 June 2022 Published date : 30 June 2022 To cite this document:
Lena, R. A., & Dalimunthe, Z. (2022).
VALUATION OF E-COMMERCE INDUSTRY BY RELATIVE
VALUATION: CASE STUDY AT PT.
BUKALAPAK. International Journal of Business and Economy, 4(2), 147-159.
Abstract: This study attempts to conduct a valuation of PT. Bukalapak (BUKA) is the first-ever e-commerce company listed on the Indonesian Stock Exchange through Electronic Initial Public Offering (e-IPO). This research contributes to the existing literature by using the proper method to analyze the fair value of BUKA.
The valuation of BUKA is carried out in one method, using the data from their prospectus period 2018-2021, namely Relative Valuation. Previous literature concluded that the aforementioned methods are the best- suited method to valuate a high-technology company.
Given the current condition where the stock price is highly volatile - a high degree of uncertainty when calculating expected income in the e-commerce business - and uncertainty external factor because of Covid-19.
Taking these circumstances into account, sales multipliers are the right method for assessing BUKA companies with peer companies. This research provides a valuation for investors interested in investing in the e- commerce sector, specifically Indonesia Investor.
Keywords: relative valuation, sales multiplier, e- commerce, Bukalapak.
In Indonesia, the development of e-commerce is growing rapidly. E-commerce first appeared in 2000 and began to attract many enthusiasts in 2014. This increase in interest is supported by the emergence of 50 e-commerce companies that exist in Indonesia and two of them are e- commerce made by the Indonesia founder who had reached unicorn status (Tokopedia and Bukalapak). The increase in the use of e-commerce is influenced by several things (i) efficient and lower prices for goods, (ii) the existence of ratings and reviews on stores in e-commerce, (iii) various transaction facilities, (iv) ease of comparison, (v) promotions, and others.
Unlike traditional companies whose income conditions are influenced by the amount of production, many assets, length of business, capital, and working hours, start-up or high-tech companies such as e-commerce have high-income conditions in a fast time by relying on virtual space and e-commerce business models sourced from intangible assets offered by the internet network. The differences between start-up companies and traditional companies include several elements, namely:
Table 1: The Difference Between Startup and Traditional Companies Business Model
No Element Start-up Company Traditional enterprises
1. Business targets High growth of the company Stable company
2. Risk High Low
3. Organizational Structure Varies from a team that has high skills and multitasking to becoming a team with structured management
From the beginning of the formation of the company already had a structured team 4. Funding After the early stage, the search for
investors for funding comes from venture capitalists, angel investors, and IPOs
Personal funding, family, friends, relationships, and bank loans
5. Product Related to technology and the Internet
Depending on the business sector that is being run
6. Target Consumers unknown Segmentation
Source: Due, Dahle, Steinert, & Abrahamsson (2017)
On the other side, the e-commerce industry cycle is divided into 4 (four stages) namely, seed, early-stage, late-stage, and initial public offering (IPO). First, the seed stage is a stage in the formation of the idea of the start-up concept that will be carried out. At this stage, funding is still very low because it comes from angel investors with very high risk. Second, the early stage is an advanced stage of the previous stage of the prototype, startups can participate in round funding so that they get investment from venture capital at this stage, and the risk decreases from the previous stage. The third is the early-stage, at this stage the same as before, the difference is that the late-stage has provided profits to the company. The level of risk at the late-stage stage includes a medium with an already large investment. Finally, in the mature or IPO stage, the company at this stage is expanding its business network and capital to be able to run its company.
Figure 1: Startup Life Cycle Source: Damodaran (2012)
When evaluating e-commerce business that is listed on the stock exchange, investors need to know some significant differences between e-commerce business and the old economy business such as fast-moving consumer goods (FMCG), banking, mining, traditional retail, and other sectors. According to Damodaran (2012), the differences in valuing e-commerce as a new economic sector with other industries are (i) do not have sufficient historical data, where a newly established start-up company makes it difficult to assess how its future projects will be;
(ii) has a high sales growth rate but negative revenue. This can increase the risk factor of the assessment on a number of variables to be forecasted; (iii) reliance on equity investments.
Without strong capital, the chances of surviving will be smaller; (iv) small survival rate, increases investor risk; and (v) illiquid investment.
In carrying out the valuation method in startups, it is divided into 2 (two) stages, namely pre- revenue and post-revenue. Pre-revenue is divided into 3 (three) valuation methods, namely Berkus, Risk Factor Summation, Scorecard, Venture Capital, and The First Chicago, while pre- revenue is Discounted Cash Flow (DCF), and Relative Valuation. An interesting thing that will be discussed is that Bukalapak is the first e-commerce company that will conduct an IPO that has a profit that is still negative, this study will discuss the valuation of Bukalapak through the relative valuation method, especially its sales multiplier with 9 (nine) comparison companies in 5 (five) countries.
Workflow
2. Literature Review
In previous studies, valuation methods for startups have been carried out by several researchers.
Peter Roosenboom (2007) conducted a study of how underwriters in France assess IPO companies. Through 5 approaches such as the dividend discount model (DDM), discounted cash flow (DCF), multiple valuations, economic value-added (EVA), and specific underwriter techniques. It was found that DDM, DCF, and multiple valuations were used most often while others were rarely used. DDM is used to assess mature industrial companies that have a dividend pay-out footprint and have a lower aggregate return on stock; DCF and EVA are used for companies that have higher and more volatile stock aggregate returns, and multiple valuations are used to value technology companies and their rapidly growing profits.
Researchers use 2 (two) methods that are considered the most appropriate in evaluating e- commerce, namely DCF and multiple valuations, this is because e-commerce has a more volatile rate of return and has a faster profit growth rate. This study, it is not explained the determining factors such as when and why this method can be applied, whether all companies with the method specifications mentioned above can be used at any time or not.
Damodaran (2012) on his research identify the right method for investors to evaluate start- ups/young tech firms. In this study it is said that the Venture Capitalist Method cannot be used for start-ups/young companies that are going to IPO, this is due to 2 (two) reasons, namely: (1) investors do not have a target setting of 35% or 40%, and (2) the venture capitalist method, has the luxury of information by being able to access internal data, while investors have only depended on market data. So, this study suggests DCF valuation and relative valuation as appropriate methods for evaluating IPO stocks such as start-ups and young tech companies.
The researcher agrees to use DCF to evaluate the new economic sector (e-commerce), this is because the data that is owned by investors is only the data provided on the prospectus and additional macroeconomic information from the existing news. The weakness of this study is that it does not explain the use of DCF when the economy is in recession, so investors make assumptions according to their respective beliefs. The research that will be presented by the researcher is to provide an alternative valuation based on 3 (three) assumptions, namely optimistic, moderate, and pessimistic assumptions.
Ho, C. T., Liao, C. K., & Kim, H. T. (2011) found that the level of accuracy in using the DEA and multiple valuation methods was 70%. Even so, the researcher concludes that the two approaches can still help investors in making investment decisions regarding sales, purchases, long-term, short-term, or combined. Through the DEA and Multiple valuation approaches, the researcher explains that both of them can also help investors in diagnosing the company's health by answering several related questions:
1. Is the company's performance efficient?
2. At what level are the related industries?
3. Is the company overvalued/undervalued?
The multiple valuation approach is used in the research being proposed, besides being able to assist in analyzing the company's health, the multiple valuation methods have 2 types, namely:
equity multiples and enterprise value. With several ratios that have been found in previous research, these ratios will also be used in e-commerce which is used as a reference for research case studies. Despite 70% accuracy, multiple valuations can help with the shortcomings of traditional DCF.
The drawback of this research is addressing the different accounting formats of each company, so it takes more time to equalize the format of each company that is the subject of research.
3. Method
This research employs a case study approach with PT. Bukalapak (BUKA) as the subject.
Additionally, this research employs both qualitative and quantitative methodologies. This study employs a qualitative method to assess business rivalry and the organization. The quantitative approach is used to determine the company's fair value (valuation). Comparison research is undertaken to compare the company's value, in this case BUKA, to the e-commerce industry that has launched an IPO.
The data for this research is secondary, derived from the financial statements of the Bukalapak company as listed on the Indonesia Stock Exchange (IDX) between 2018 to 2021. Balance sheets, profit/loss statements, and cash flow statements are all examples of financial reporting.
Meanwhile, the peer companies such as Amazon, Mercardo Libre, Shopify, Sea. Ltd., e-Bay, Jumnia Technologies, Alibaba, JD.com, and Bilibili used data from their respective stock exchanges to do comparable analyses.
In this research, relative valuation will be used to analyze value investment from the perspective of PT. Bukalapak to the peer companies. The reasons for using relative valuation are (i) during the IPO of PT. Bukalapak is still experiencing minus profits and (ii) uncertainty due to Covid-19, causes this method to be most suitable to use because relative valuation seems to be in line with market conditions, even though this valuation is only a short run.
Relative Valuation
Relative valuation is a method used to compare the value of a company's assets with the value of assets in similar industries. The basic idea of this approach is that every asset and the same company should have the same price as well. Relative valuation is obtained by multiplying the average ratio of similar industries by the accounting value of the company.
Relative valuation uses ratios to assess stock prices using several measures of stock performance against the company to be compared, such as comparing market capitalization and its income, equity, and other financial data. Luca Inchingolo (2021) revealed that the use of company valuation using the multiples valuation approach most often uses the (i) Asset side approach, the ratios used in this method are EV/EBITDA, EV/EBIT, and EV/SALES to measure company capital and (ii) Equity side, the ratios used in this method are price-to- earnings, price-to-book value, and price-to-sales to estimate the value of equity.
According to Luca Inchingolo (2021), the valuation multiples approach is divided into several stages, namely:
1. Identifying similar companies 8 to 15 similar companies
2. Determine the temporal scheme of the reference of the selected company 3. Determining the proper use of relative valuation multiples
4. Apply relative valuation multiples to the selected company.
4. Results and Discussion
At the end of 2020 BUKA had a total of 8,161,561 series A, C, D, E, A1, F, and G shares at different prices, namely:
Table 2: Source: BUKA Prospectus Round
Series Share outstanding Nominal Price (IDR)
Market Capitalization
(IDR)
Percentage
A 507.278 1.000 570.278.000 6.22%
B 225.469 1.000 225.469.000 2.76%
C 1.979.022 1.000 1.979.022.000 24.25%
D 2.426.549 1.000 2.426.549.000 29.73%
E 2.189.593 1.000 2.189.593.000 26.83%
A1 263.631 3.000.000 790.893.000.000 3.23%
F 282.141 3.000.000 846.423.000.000 3.46%
G 287.878 3.000.000 863.634.000.000 3.53%
Total 2.508.277.911.000 100%
Prior to the IPO offering, BUKA's number of shares underwent a classification change from the number of series A, B, C, D, E, A1, F, and G shares to ordinary shares at a price of IDR 50, - so that there was an increase in the number of shares by 77,296,514,554 shares. When conducting the IPO BUKA, it increased the number of shares by 25% from the previous number of shares, so that it had a total number of shares outstanding as many as 103,062,019,354.
Table 3: Before and After BUKA Share Outstanding IPO
Before IPO IPO
Stakeholder Share Outstanding
Nominal Price
(Rp)
Market Capitalization
(Rp)
Share Outstanding
Stock Price (Rp)
Market Capitalization
(Rp)
% PT. Kreatif
Media Karya
24.661.347.283 50 1.233.067.364.150 24.661.347.283 850 20.962.144.190.550 23.93%
API Hongkong Investment Limited
13.448.351.573 50 672.417.578.650 13.448.351.573 850 11.431.098.837.050 13.05%
Archipelago Investment
Pte Ltd
9.736.593.677 50 486.829.683.850 9.736.593.677 850 8.276.104.625.459 9.45%
Publik 25.765.504.000 850 21.900.679.080.000 25%
Pemegang saham dibawah 5%
29.450.222.021 50 1.472.511.101.050 29.450.222.021 850 25.032.633.717.850 28.58%
Total 2.508.277.911.000 87.602.716.450.900 100%
Source: BUKA prospectus
Based on the calculation of relative valuation on August 5, 2021, after the market closed, it can be seen that the company's comparison to BUKA's valuation during its IPO at a price of IDR 850, -. Based on the adjustments in the enterprise-to-sales, price-to-book, and price-to-sales, each stock has a positive valuation so that it can be compared.
Table 4: Comparison Companies
Source: many sources, processed.
BUKA's comparison companies are Amazon, Mercardo Libre, Shopify, Sea. Ltd., e-Bay, Jumnia Technologies, Alibaba, JD.com, and Bilibili. All e-commerce companies were chosen based on industry similarities and have completed initial public offerings in their respective countries. enterprise value-to-sales are more reliable in the asset approach because the gap ratios for each e-commerce are not excessively high or negative. According to the enterprise value-to-sales comparison, BUKA is 99.5x overvalued compared to the industry average of 8.7x.
The company's assessment via price-to-book value reveals that the median value of the nine comparison companies is lower than BUKA's price-to-book value by 7.8x and 29x, respectively. According to these findings, BUKA is also considered above its fair value (overvalued). On the other hand, price-to-sales is regarded as more reliable for growing businesses that have not yet achieved profitability. Price-to-sales results indicate that BUKA is also overvalued, with a consequence of 101.4x compared to the peer companies' 12.4x.
No E-Commerce Ticker Country IPO date Financial Report EV/EBIT EV/EBITDA EV/Sales P/E Ratio Price / Book P/Sales
1 Amazon.com, Inc. AMZN USA 15-May-1997 Q2 '21 58.8x 36.2x 3.9x 58.1x 14.9x 3.9x
2 Mercado Libre MELI Argentina 9-Aug-2007 Q2 '21 286.5x 196.3x 16.3x -65,770.7x 1,095.8x 16.1x
3 Shopify, Inc. Class A SHOP Canada 21-May-2015 Q2 '21 392.4x 350.2x 48.3x 78.6x 19.1x 50.1x
4 Sea Ltd. (Singapore) Sponsored ADR Class A SE Singapore 20-Oct-2017 Q2 '21 -116.1x -138.9x 22.8x -98.5x 44.3x 23.4x
5 eBay Inc. eBAY USA 21-Sep-1998 Q2 '21 12.7x 10.7x 3.7x 3.5x 3.4x 4.4x
6 Jumia Technologies AG Sponsored ADR JMIA Nigeria 12-Apr-2019 Q2 '21 -8.2x -8.4x 8.7x -11.8x 3.8x 12.4x
7 Alibaba Group Holding Ltd. Sponsored ADR BABA China 19-Sep-2014 Q2 '21 30.1x 20.7x 4.1x 25.0x 3.1x 4.5x
8 JD.com, Inc. Sponsored ADR Class A JD China 22-May-2014 Q2 '21 106.2x 41.9x .7x 19.6x 2.8x .8x
9 Bilibili, Inc. Sponsored ADR Class Z BILI China 28-Mar-2018 Q2 '21 -39.8x -68.4x 11.7x -50.2x 7.8x 12.9x
AVERAGE 80.3x 48.9x 13.4x -7,305.2x 132.8x 14.3x
MEDIAN 30.1x 20.7x 8.7x 3.5x 7.8x 12.4x
PT. Bukalapak BUKA Indonesia 06-Aug-21 Q2'21 -111.8x 115.2x 99.5x -114.2x 29.0x 101.4x
Based on the research above, BUKA's valuation will use a price-to-sales or sales multiplier because there is still a negative valuation if using a multiplier that uses profit. Sales multiplier is a benchmark in assessing a company through its sales. To be able to calculate the sales multiplier is to divide the market capitalization by revenue or sales.
Buka's sales multiplier assessment will be divided into 3 (three), which are before the IPO when the share price is IDR 50, on opening IPO day with its share price is IDR 850, and after the IPO when the market closes on August 6, 2021, at a price of IDR 1,060. Then the following results are obtained:
Table 5: Sales Multiplier Comparable BUKA vs Peer Companies Before and DuringIPO Ticker
Multiplier Sales Before IPO 5 August 2021
Multiplier Sales During IPO 5 August 2021
Multipler Sales 5 August 2021
BUKA 5.97x 101.44x
AMZN 3.86x
MELI 16.07x
SHOP 50.05x
SE 23.37x
EBAY 4.44x
JMIA 12.44x
BABA 4.53x
JD 0.83x
BILI 12.90x
Average 14.28x
Median 12.44x
Source: many sources, processed.
Table 6: Sales Multiplier Comparable BUKA vs Peer Companies After IPO (Day One) Ticker
Multiplier Sales After IPO 6 August 2021
Multiplier Sales 6 August 2021
BUKA 126.50x
AMZN 3.82x
MELI 15.81x
SHOP 49.39x
SE 23.27x
EBAY 4.44x
JMIA 12.48x
BABA 4.47x
JD 0.81x
BILI 12.63x
Average 14.12x
Median 12.48x
Source: many sources, processed.
Table 4 shows BUKA’s share price when the price of IDR 50 has an undervalued with a yield of 5.97x compared to the median of peer companies 12.44x, in the same table when the IPO BUKA has a share price of IDR 850 per share the sales multiplier value increases eightfold to 101.44x, and a higher increase after the IPO with a value of 126.5x or 10 times.
Covid-19 has affected e-commerce stock price performance during 2021.
Figure 2: Peer Companies Market Capitalization and Revenue Q1-Q4 2021 Source: many sources, processed.
In the picture, it can be seen that the increase in e-commerce revenue during the year has increased. However, it was not followed by market capitalization, it was found that the market capitalization in e-commerce USA (Amazon and Shopify) and Singapore (SE) experienced an increase. The market capitalization in e-commerce in other countries such as China, Argentina, and Nigeria have decreased. This shows pandemics affected an increase and decrease in the price of shares in the countries.
Figure 3: Sales Multiplier Buka vs Peer Companies for a Year in 2021 Source: many sources, processed.
The decline in the stock price affected the value of the sales multiplier in e-commerce, it was proven that BUKA experienced a decline when its stock price plunged after the second day after the IPO. Even so, BUKA per December 22, 2021, with its price of IDR 446, - figure 2 shows BUKA sales multiplier still overpriced compared to the peer companies, even though its share price plunged 47% from the IPO price (IDR 850, -).
Based on the size of the company during 2021, it was found that e-commerce companies with large sizes have an undervalued median value compared to e-commerce with medium and small sizes. The determination of the size of e-commerce is based on the size of the assets owned during the year.
Figure 4: Sales Multiplier BUKA vs Peer Companies Based on Size Company Source: many sources, processed.
Stock prices for e-commerce with large sizes tend to be more stable in the face of uncertain situations such as the Covid-19 pandemic. In contrast to e-commerce with medium and small sizes, the median sales multiplier value of both tends to be volatile.
The research also compared sales multipliers based on the peer companies in developed and developing countries. E-commerces that fall into the advanced countries' peers are Amazon, Shopify, eBay, Alibaba, JD, and Bilibili, while developing countries’ peer are Mercardo Libre and Jumia.
Figure 5: Sales Multiplier BUKA vs Peer Companies Based on Countries Category Source: many sources, processed.
Sales multipliers in developed countries are seen to have undervalued compared to developing countries.
5. Conclusion
The relative valuation method is more market-relevant than the DCF method, which requires numerous assumptions. In addition, the negative profit owned by BUKA despite its IPO and uncertain global circumstances causes the relative valuation method to better describe the current state of BUKA.
Based on the 6 (six) relative valuations (multiplier valuations), a negative valuation is obtained if the multiplier valuation uses profit so that the valuation of BUKA and peer companies use a sales multiplier. Buka's share price before the IPO showed an undervalued value compared to peer companies, but when BUKA’s IPO had a much higher sales multiplier value of up to eight and ten times. This shows that the IPO price offered is overpricing compared to the median peer companies.
On the other hand, e-commerce tends to have a lower valuation value when it has a larger company size and is in a developed country. This concludes that investment in the e-commerce sector will be more profitable if it has larger assets and is in developed countries.
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