New report by Morgan Stanley values Rocket Internet at $7.2b

A cautiously optimistic report by Morgan Stanley says Rocket Internet has enough liquid cash reserves to keep sustaining the losses reported by some of its major portfolio companies, such as Zalora and Jabong (and others in its Global Fashion Group) and ecommerce store Jumia.

The report, a copy of which a source passed to Tech in Asia, says funding requirements for Rocket Internet companies are falling quickly. Profitability improved in Q4 2015 and the firm expects three of its major startups to be wholly profitable by 2017. Morgan Stanley points to Rocket’s cash reserves of US$1.6 billion as evidence to dispel any remaining funding concerns.

Lazada was a ‘crown jewel’ for Rocket Internet. It could have fetched a much higher price.

Lazada’s recent sale to Alibaba is also discussed. Morgan Stanley points to both the strengths and weaknesses of the deal. It says Rocket was able to create the “leading ecommerce platform in parts of Southeast Asia.” Furthermore, its brand, traction, and infrastructure were sufficiently strong to fend off the threat of Alibaba to the point that the Chinese ecommerce giant chose to buy the firm outright rather than compete with it head-on.

Despite Lazada losing US$297 million in 2015, Rocket’s cumulative investment of US$20 million in it translated into a payout of US$339 million.

But Morgan Stanley says the deal also indicates the “limitation of [Rocket’s] model.” The investment firm adds that Lazada was a “crown jewel” for Rocket Internet and that it could have fetched a much higher price than the reported US$2 billion (US$1.5 billion pre-money) that Alibaba paid out. The lower valuation was primarily due to the threat of Alibaba entering Lazada’s turf, and the significant uptake in funding it would have taken for Rocket to compete.

Morgan Stanley says it values Rocket Internet shares at US$44 apiece, significantly higher than the US$32 that they’re trading on the Frankfurt Stock Exchange today. The entire company should be valued at US$7.2 billion (a figure which includes cash reserves of US$1.6 billion), far higher than Rocket’s existing market capitalization of US$4.62 billion.

Rocket is a unique play on emerging market internet.

Basically, what this means is that Rocket Internet’s shares are trading at a significant discount and there’s much more value in the firm than what investors may believe.

Talk of Rocket’s opacity and its true valuation isn’t exactly new. Swedish investment firm Kinnevik, one of Rocket’s biggest investors, values its portfolio in the company at half or even less than what Rocket does. Quartz points to Rocket’s holding structure – featuring shareholdings in more than 500 far-flung companies – and says investors can’t rely on existing, stable practices that they’d normally use to judge valuations.

And that’s a view Morgan Stanley seems to agree with. The report says “Rocket is a unique play on emerging market internet with exposure to fast growing markets with low ecommerce penetration.” Because the Berlin-based firm is daring to venture where the likes of Amazon fear to tread, it’s building a model that is mysterious, yet efficient and valuable.