Alibaba: High Safety Margin

Seekingalpha08-18

Alibaba beat Q1’25 earnings expectations, but missed on revenue.Alibaba's saw a 3 PP revenue growth deceleration in the last quarter due to a decline in growth in the Taobao and Tmall Group.However, ...

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revenue growth deceleration in the last quarter due to a decline in growth in the Taobao and Tmall Group.However, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4715369-alibaba-high-safety-margin\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE0008368742.USD","symbol_name":"首域中国增长基金I Acc","start_time":0,"source_url":"https://seekingalpha.com/article/4715369-alibaba-high-safety-margin","article_id":"2460786326","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2460786326","pubTimestamp":1723958992,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Alibaba beat Q1’25 earnings expectations, but missed on revenue.Alibaba's saw a 3 PP revenue growth deceleration in the last quarter due to a decline in growth in the Taobao and Tmall Group.The e-Commerce company generated a ton of free cash flow and bought back a large amount of its shares again.Alibaba's low valuation at a P/E ratio of 8.5X presents a favorable risk profile for investors, despite potential risks in the e-Commerce sector.","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IE0008368742.USD":"首域中国增长基金I Acc","IE00BMPRXN33.USD":"NEUBERGER BERMAN 5G CONNECTIVITY \"A\" (USD) ACC","LU0572944931.SGD":"Janus Henderson Horizon China Opportunities A2 SGD","LU0307460666.USD":"EASTSPRING INVESTMENTS CHINA EQUITY \"A\" ACC","LU0516423091.SGD":"FULLERTON LUX FUNDS - ASIA FOCUS EQUITIES \"I\" (SGD) ACC","BK4509":"腾讯概念","LU0348825331.USD":"ALLIANZ CHINA EQUITY \"A\" (USD) INC","LU1105468828.SGD":"Allianz Total Return Asian Equity AM DIS H2-SGD","LU0047713382.USD":"BGF EMERGING MARKETS \"A2\" ACC","09988":"阿里巴巴-W","LU0588546209.SGD":"Eastspring Investments - China Equity Fund AS SGD","LU0633140560.USD":"AB EMERGING MARKET MULTI ASSET PORTFOLIO \"A\" (USD) 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Cloud and international e-Commerce prevented worse.The e-Commerce company generated a ton of free cash flow and bought back a large amount of its shares again.Alibaba's low valuation at a P/E ratio of 8.5X presents a favorable risk profile for investors, despite potential risks in the e-Commerce sector.maybefalse/iStock Unreleased via Getty ImagesAlibaba reported better than expected earnings results for its first-quarter due to a reacceleration of top line growth in its Cloud business and strong growth in its Alibaba International Digital Commerce Group. Alibaba generated a ton of free cash flow again in the first-quarter and returned even more to shareholders via stock buybacks. I continue to believe that Alibaba represents strong value for investors given the company's free cash flow profitability. A rebound in the Chinese economy could further support the company's top line growth in its biggest division, the Taobao and Tmall Group.Data by YChartsPrevious ratingI rated shares of Alibaba a strong buy in my last coverage because of the e-Commerce company’s strong underlying profitability. Further, Alibaba announced more aggressive capital returns earlier this year, resulting in a strong dividend proposition as well. Alibaba generated a ton of free cash flow again in the last quarter and is buying back shares aggressively as part of the company's capital return program. I believe Alibaba's shares remain highly undervalued and the e-Commerce company's risk profile is skewed to the upside.Alibaba beat Q1’25 earnings resultsAlibaba reported moderately good financial results for the first fiscal quarter. The Chinese e-Commerce company reported adjusted earnings of $2.29, which beat the consensus estimate by $0.20 per-share. The top line came in at $33.9B which missed the average Wall Street prediction by $686M, chiefly because of weaker performance in the Taobao and Tmall Group.Seeking AlphaThe Taobao and Tmall Group consolidates all of Alibaba’s domestic e-Commerce activities and although the segment benefited from high-single-digit online GMV growth in the last quarter, driven by promotions, the segment nonetheless saw a decline in revenue due to weaker performance in the direct sales business. Here, Alibaba suffered a 9% year-over-year segment top line decline as customers bought fewer electronics products.Taobao and Tmall Group represented 43% of Alibaba’s consolidated top line (before consolidations). Alibaba’s domestic e-Commerce business generated 113.4B Chinese Yuan ($15.6B) in revenue in the first fiscal quarter, showing a decline of 1% year-over-year. In total, Alibaba’s revenues increased 4% year-over-year to 234.2B Chinese Yuan ($33.5B), showing a decline of 3 PP quarter-over-quarter.AlibabaWhile e-Commerce disappointed given a sluggish recovery in the Chinese economy, the Cloud business as well as the international e-Commerce business saw strength. Cloud generated revenues of 26.5B Chinese Yuan ($3.7B), showing 6% top line growth due to growing adoption of AI products. Importantly, while domestic e-Commerce struggles, Alibaba did well with its international segment. The International Digital Commerce Group/AIDC generated 29.3B Chinese Yuan ($4.0B) in top line growth (+32% Y/Y), spurred by growing cross-border transaction on the Aliexpress platform.AlibabaStrong capital returns set to continueAlibaba was widely free cash flow-profitable in previous quarters and remained so in Q1’25. In the first-quarter of FY 2025, Alibaba generated 17.4B Chinese Yuan ($2.4B) in free cash flow. Alibaba earlier this year guided for a stock buyback of $25B and the company repurchased 613 million ordinary shares for a total of $5.8B in the last quarter. In the last year, Alibaba bought back $15.2B of its shares and I would expect the e-Commerce company to continue to return more cash to shareholders in the coming years.AlibabaAlibaba’s valuationOne of the most attractive features of an investment in Alibaba is its low valuation based off of earnings. Alibaba is currently valued at a price to earnings ratio of 8.5X which implies a high safety margin, in my opinion. A number of factors have affected Alibaba’s valuation factor negatively in the last three to four years, including a government crackdown on large and monopolistic technology and e-Commerce companies, an economic slowdown relating to draconian pandemic-era shutdowns as well as moderating Cloud growth.What can't be argued with, however, is that Alibaba is widely profitable on both an earnings and free cash flow basis which is why I continue to believe that risks with Alibaba are not nearly as high as investors may be tempted to believe. Alibaba's FY 2025 P/E ratio of 8.5X is 27% below its 3-year average P/E ratio and other e-Commerce rivals are priced at similarly low P/E ratios.PDD Holdings (PDD) and JD.com (JD) are trading at P/E ratios of 9.5X and 7.0X and both companies have a lot going for them. PDD Holdings own the deal-focused Temu platform which is crushing it and is also widely free cash flow-profitable. I recommended PDD Holdings because of Temu, low valuation and positive FCF in my July work: 9X P/E, Strong Growth, High Safety Margin. JD.com is also profitable and too cheap, in my opinion, with a price-to-earnings ratio of 7.0X.In my last work on Alibaba I valued the company at $125 given a historical valuation average of 13.0X. Since consensus estimates have fallen to $9.32 per-share for next year, I am lowering my fair value estimate to $121 per-share. Given that investors can still expect a ton of stock buybacks and capital returns going forward, I maintain my strong buy rating for Alibaba.Data by YChartsRisks with AlibabaThe biggest risk for Alibaba, as I see it, would be a potential slowdown in the e-Commerce business which still accounts for the overwhelming majority of the company’s consolidated top line. Although Alibaba is seeing positive momentum in other businesses, like Cloud and AIDC, the company is mainly focused on its e-Commerce operations. If the Chinese economy weakens, Alibaba may see an out-sized decline in its top line and free cash flow.Final thoughtsAlibaba’s first fiscal quarter earnings sheet was better than expected in terms of earnings, but missed on the top line due to a sluggish e-Commerce performance. Positive take-aways, however, related to reaccelerating growth in Cloud and a strong performance in International Digital Commerce Group. Free cash flow remained strong and Alibaba shareholders can continue to expect a generous amount of capital returns going forward. From a valuation perspective, Alibaba's shares are a steal and although I am lowering my fair value estimate by $4 to $121 per-share, I believe shares are still deserving of a strong buy rating!","kind":"highlight","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":17,"commentSize":0,"repostSize":1,"favoriteSize":2,"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":"4.29.3","shortVersion":"4.29.3","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/2460786326"}