Why Alibaba's Post Fiscal Q2 Stock Pullback Presents A Great Opportunity

Seekingalpha2023-11-17

Alibaba Group Holding Limited's recent fiscal Q2 earnings report presents a mixed bag of results, but its international retail sector shows strong growth.The Alibaba decision not to proceed with a ...

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The recent pullback in Alibaba Group Holding Limited's (NYSE:BABA, OTCPK:BABAF) stock price presents investors with an attractive opportunity to tap into a company poised for potentially accelerating growth. While the latest fiscal Q2 earnings report presents a mixed bag of results, it's important to view this in the context of Alibaba's strategic shift towards a more sustainable growth model. Despite the temporary setbacks, Alibaba's robust financial performance, particularly in its international retail sector, paints an encouraging picture for the future.Fiscal Q2 Earnings AnalysisAlibaba's recent earnings report has presented a mixed bag of results, with the top line and adjusted EPS generally meeting expectations. However, the company's decision not to proceed with a full spinoff of the Cloud Intelligence Group, largely due to the U.S. government's restrictions on exports of advanced computing chips and semiconductor manufacturing equipment, is likely to trigger a negative response in the share price, in our view. Similarly, Freshippo's deferred IPO plan adds to the uncertainties.Notable positives include the performance of Alibaba International Digital Commerce Group (AIDC). This unit has delivered a strong 53% YoY revenue growth, up from 41% last quarter. International retail revenue outpaced this, achieving an impressive 73% YoY growth. AIDC's ongoing preparations for external fundraising could further bolster its financial performance.Total adjusted EBITA exceeded our estimate by 9%, primarily due to better-than-expected profits from Taobao and Tmall Group. Furthermore, the company's announcement of its first annual cash dividend distribution of US$1 per ADS, yielding 1.1% on the current share price, is an encouraging development for investors.On the downside, the cloud business underperformed, registering a mere 2% YoY revenue growth—falling short of our 5% YoY estimate. The decision to halt the full spinoff of the Cloud Intelligence Group, primarily because of U.S. export restrictions, complicates the future of this segment.The modest YoY decline in Taobao/Tmall's online paid GMV this quarter also raises concerns. This downturn could be symptomatic of broader challenges in the e-commerce sector, or it might be specific to Alibaba's platform. More data and subsequent quarters' results will be needed to understand this trend fully.Insights From CallAlibaba Group's earnings call focused on a strategic shift towards a more sustainable growth model anchored on AI-driven demand for scalable and networked cloud computing services. The company opts against spinning off its Cloud Intelligence Group due to uncertainties from U.S. export restrictions on advanced computing chips. Instead, Alibaba is betting on the surge in AI, anticipating a continuous growth in demand for computing power and large model services.The company's capital management plan revolves around four key areas. Firstly, enhancing return on invested capital is a priority. Alibaba aims to increase its single-digit ROIC to double digits, indicating an emphasis on profitability and efficiency improvements. Secondly, Alibaba plans to invest in strategic growth opportunities highlighted by its business reorganization, leveraging its robust balance sheet.Thirdly, monetizing non-core assets is a strategic move for Alibaba. The company's balance sheet carries USD $67 billion in equity securities and other investments, which are not core but strategically important. The company is exploring ways to monetize these assets and return value to shareholders. Lastly, Alibaba's commitment to returning value to shareholders is evident in its share repurchase program and newly announced plans to pay an annual dividend.Alibaba's Cloud Intelligence Group is at the forefront of the company's growth strategy. This strategy hinges on AI and prioritizing public cloud. The Group plans to aggressively invest in AI-related software and hardware, symbolizing a shift from traditional to AI computing. Alibaba envisions most AI computing to run in the cloud in the future and is positioning itself to be a leading provider of stable and efficient AI infrastructure across all industries.The company is also creating an open and prosperous AI ecosystem. This was demonstrated by its recent announcement at the Apsara conference of a comprehensive upgrade of its AI infrastructure. Alibaba is actively managing the quality of its cloud revenue to enhance profitability. It plans to reduce project-based revenue exposure, invest more in core products for the public cloud, and improve the revenue quality of the cloud business by focusing on the public cloud.Financial & ValuationNote: All historical data in this section comes from the company’s SEC filings, and all consensus numbers come from FactSet.Looking at the bigger picture, BABA's revenue growth, with a CAGR of 20.1% over the past three fiscal years, is impressive. However, forecasts suggest a slowdown in growth, with revenues expected to grow by 7.2% this fiscal year, reaching $132.5 billion, and by 9.8% the following year, reaching $145.5 billion. The EBIT margin, which decreased by 6.4% points over the past three fiscal years, from 18.0% to 11.6%, is expected to expand by 371 basis points this fiscal year to 15.3% and by another 7 basis points the following fiscal year to 15.4%.We see a positive trend in the company's share dynamics. Over the past three years, BABA spent 4.4% of its revenue on share-based compensation. Meanwhile, the diluted outstanding common shares decreased by 6.4%, suggesting a strategic usage of share repurchases to offset shareholder dilution. This strategy, however, has not driven EPS growth significantly, which grew at a CAGR of only 1.5% over the past 3 fiscal years, lagging behind its revenue growth. The consensus forecasts EPS to increase by 15.8% to $8.99 this fiscal year, and by 4.5% to $9.40 the following fiscal year.The projected free cash flow (\"FCF\") for the current fiscal year is $22,194 million, a 16.7% FCF margin, which is a drop compared to four fiscal years ago, when it was $21,137 million, a 29.6% FCF margin. Considering the average FCF margin of 21.5% over the past four completed fiscal years, this seems to be a declining trend, which is a cause for concern. On the other hand, the capital expenditure as a percentage of revenue averaged 7.3% over the same period, suggesting that the business has relatively high capital intensity.Alibaba's balance sheet looks healthy, with a net cash of $48,843 million. Now that Alibaba is paying a dividend, the stock should attractive income-focused investors.Looking at its valuation on 2024 estimates, BABA is trading at an EV/Sales multiple of 1.0, an EV/EBIT multiple of 6.3, a P/E multiple of 8.4, and a FCF multiple of 7.9. These valuation multiples are significantly lower than the S&P 500, suggesting that the stock is undervalued.Using the rolling forward 12-month P/E metric, BABA is currently trading at 9.4, which is a historically low valuation relative to its 5-year mean of 19.9 and a 2-standard deviation range of 7.5 to 32.3. Compared to its peer JD, which is trading at a forward 12-month P/E of 8.9, BABA seems to be relatively well-valued.ConclusionIn an era where the power of AI and cloud computing is rapidly reshaping industries, Alibaba stands as a potential titan ready to emerge from the shadows. Its strategic shift towards AI-driven demand for scalable and networked cloud computing services, coupled with its commitment to return value to shareholders, underscores the company's resilience and determination to stay ahead of the curve.Despite the recent pullback in the stock price, Alibaba's strong fundamentals, coupled with its historically low valuation relative to its 5-year mean, make it an attractive proposition for value investors. The company's robust balance sheet and impressive international retail growth, along with its focus on profitability and efficiency improvements, suggest a positive trajectory going forward. With its Cloud Intelligence Group at the forefront of the company's growth strategy, Alibaba is clearly positioning itself to be a leading provider of stable and efficient AI infrastructure across all industries.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":10,"commentSize":0,"repostSize":0,"favoriteSize":3,"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":"4.24.2","shortVersion":"4.24.2","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/2384068708"}