Alibaba Is Back In The Buy Zone

Seekingalpha2023-09-15

Alibaba's stock tumbled after the departure of Cloud head Daniel Zhang, which led to concerns about the company's management.The management shakeup at Alibaba includes bringing back founding ...

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am56
2023-09-15
am56
Bought yesterday
Bennobecks
2023-09-15
Bennobecks
LFG
goal86sg
2023-09-15
goal86sg
[Smile]

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The stock had been in the middle of a run-up when news broke that Cloud head Daniel Zhang was stepping down from his post. Zhang, who was responsible for many of Alibaba’s biggest successes, including the 11/11 shopping festival, had previously been removed from his CEO job. Although he will remain in charge of a $1 billion investment fund, Zhang’s role at Alibaba has definitely gotten smaller over time.Investors seem to have sold off Alibaba this week because of Zhang’s departure from the company. Trading in Chinese stocks other than Alibaba was strong between September 10 and September 13. For example, PDD Holdings (PDD) regained much of the ground it lost in the wake of Grizzly Research’s short report.Daniel Zhang was an important player at Alibaba over the last decade. Not only was he set to head up the cloud business, he was previously CEO of the entire company. The fact that he resigned led to fears that Alibaba’s management had forced him out. However, the press release announcing the move stated that the idea to resign was Zhang’s own, and that the board had to contemplate it before accepting it. Therefore, it does not appear that Zhang was “forced out.” He may have simply decided that he had too much on his plate, as he was concurrently serving as Alibaba Cloud’s CEO and Chairman. His transfer to a smaller role as head of an investment fund may signal a desire to focus more of his attention on one specific role.One thing is certain:Alibaba’s leadership is definitely getting a shakeup. The board is in the process of getting “founding executives” back into key roles, including several who were around from the very beginning. For example, Eddie Wu, former chief technology officer of Alipay and Taobao, has taken over the CEO role. This appears to be a positive, as Eddie Wu was around in the high-growth days when Jack Ma was just setting up Alibaba, and has a much more technical background than Zhang does. For this reason, the management shakeup at Alibaba has been on the whole a good thing, as I’ll demonstrate in the ensuing paragraphs.Why Alibaba is Changing Its Management TeamAlibaba is in the process of shuffling its management team to prepare for its future as multiple listed companies rather than just one. After Alibaba Cloud, Lazada, and Freshippo are spun off, they will no longer be accountable to Alibaba’s board of directors. Instead, they will operate as fully independent listed entities. Therefore, executives who currently wear many hats will need to move into roles in which they can focus on one specific part of BABA’s business. It’s for this reason that Daniel Zhang was moved to the Cloud in the first place. As CEO, he was involved in China commerce, international commerce, the cloud and digital media. Of course, he was going to have to pick one of those, as the Cloud and the e-commerce businesses were set to become separate listed entities. The move from the cloud to the investment fund is a little harder to explain, but it does not signify Zhang being ousted from Alibaba as a whole.Competition Heats UpIf Alibaba is in the process of splitting itself up into leaner, meaner machines, it has a very good reason to:Competition.Competition in the Chinese e-commerce space is heating up, with PDD Holdings greedily eating up market share in China and abroad, and JD.com (JD) continuing to hold its own. There was a time when Alibaba had greater than 70% market share in China. Today, its share is “only” 49%. I put the word “only” in scare quotes, because it’s a high share, it’s just less than it was in the past.The competition Alibaba is facing right now is only going to intensify. In its most recent quarter, PDD grew its revenue by 66% and its earnings per share (“EPS”) by 44%. A lot of that growth likely came from the U.S. market, where TEMU is picking up steam, but some of it may have come from China as well. Its share increased from 3% to 20% in the 2017-2020 period.China’s 2021 regulatory crackdown ramped up the competitive challenges facing Alibaba. It had to scrap its “choose one of two” policy and accept payment processors other than Alipay. With the loss of these two policies, Alibaba’s ability to “lock in” market share was diminished. Now it has to compete with PDD and JD head to head, and that’s going to be a lot harder.In order to compete effectively in China’s new e-commerce landscape, Alibaba is going to need full time executives for each of its companies that can give each one the attention it deserves. This, along with management’s desire to pass value on to shareholders, is the main reason why Alibaba is being split up into several different companies. With dedicated management at the head of each former BABA subsidiary, the companies will enjoy unified leadership. If the leadership selected is good, then the restructuring will help the companies compete effectively in China’s rapidly changing e-commerce industry.So, it’s not hard to see why Daniel Zhang was removed from leadership at Alibaba Cloud. His main claim to fame was his contribution to the e-commerce business, most notably the creation of the 11/11 shopping festival. Running a cloud company was never Zhang’s strong suit in my opinion, he was part of the e-commerce business initially. Now, with a $1 billion fund at his disposal, he will be able to shift his focus back to making acquisitions in that industry.ValuationNow we get to the most intriguing part of the analysis about Alibaba:The valuation.At today’s prices, BABA is one of the cheapest big tech names on earth, trading at:10.36 times adjusted earnings.19 times GAAP earnings.1.85 times sales.1.7 times book value.7.7 times operating cash flow.9.73 times free cash flow.It’s pretty cheap going by multiples. Additionally, if you take the last 12 months’ free cash flow and discount it at the treasury yield, assuming no growth, you get a $225 fair value estimate. That implies more than 100% upside. If you discount it at the treasury yield plus a 6% risk premium, you get a $90.2 price target. Either way, the stock has upside from today’s ridiculously low level.Risks to Watch Out ForDespite being quite cheap and having solid growth, Alibaba stock is not risk-free. To the contrary, it is subject to several risks, including:Political risk. The political tensions between the U.S. and China have been the overhang in Chinese stocks in recent years. Going back to the Trump era, both countries have been slapping one another with tariffs, as well as arguing over chips and the status of Taiwan. Technically, these issues don’t affect Alibaba’s fundamentals, but they do affect sentiment toward Chinese stocks as a whole, which can influence how said stocks trade.Competition. China’s e-commerce market is more competitive now than ever before. There are three large players in the space, along with countless small ones. Alibaba’s growth in China has begun to slow down, chiefly because of its newfound competition. For now, the international business is seeing stellar growth (about 60% year over year), but that could come under pressure too as Temu moves into more and more markets.Issues with the spinoffs. Alibaba had planned on spinning off its Freshippo business this year, believing it would be able to raise $6 billion to $10 billion for the offering. Instead, it was quoted at $4 billion. The offer was put on hold. Basically, the company delayed the IPO because it thought it would be able to raise more money at some point in the future. Should that be the thinking today, Alibaba may delay its other spinoffs if the offer prices are not to its liking.The risks and challenges above are worth keeping in mind. Nevertheless, Alibaba stock is currently very cheap, its management is doing buybacks, and the company has seen a re-acceleration in its revenue growth. On the whole, I’m content to keep holding. At these levels, I’d even consider buying more.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":220196023083104,"gmtCreate":1694780191693,"gmtModify":1694780195842,"author":{"id":"3584247049802991","authorId":"3584247049802991","name":"am56","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":4,"crmLevelSwitch":0,"authorIdStr":"3584247049802991","idStr":"3584247049802991"},"htmlText":"Bought yesterday","listText":"Bought yesterday","text":"Bought yesterday","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/220196023083104","repostId":2367638338,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":220189075181592,"gmtCreate":1694778334797,"gmtModify":1694778339076,"author":{"id":"3573269776310924","authorId":"3573269776310924","name":"Bennobecks","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/0a8758340a08196056f8bc1e54805193","crmLevel":4,"crmLevelSwitch":1,"authorIdStr":"3573269776310924","idStr":"3573269776310924"},"htmlText":"LFG","listText":"LFG","text":"LFG","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/220189075181592","repostId":2367638338,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":220136240255016,"gmtCreate":1694765542034,"gmtModify":1694766229961,"author":{"id":"3579764485113471","authorId":"3579764485113471","name":"goal86sg","avatar":"https://static.tigerbbs.com/e067560ecd548815deb24c971643a84d","vip":1,"crmLevel":5,"crmLevelSwitch":1,"authorIdStr":"3579764485113471","idStr":"3579764485113471"},"htmlText":"[Smile]&nbsp;&nbsp;","listText":"[Smile]&nbsp;&nbsp;","text":"[Smile]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/220136240255016","repostId":2367638338,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":15,"commentSize":3,"repostSize":2,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2367638338"}