Summary
- Alibaba is a dominant ecommerce company in China which has been dubbed the "Amazon of China."
- The company announced earnings for Q123, which were not great but still better than expected with Cloud generating strong growth.
- Catalyst 1. Alibaba could be delisted in 2024, but a listing in Hong Kong could result in $30 billion in inflows from Chinese Mainland Investors.
- Catalyst 2. Alibaba owns a 33% stake in Fintech giant Ant Group which I value at over $50 billion.
- The stock is undervalued intrinsically and relative to historic multiples.
Andrew Burton
Alibaba (NYSE: BABA) has been a rollercoaster for investors over the past couple of years, after a series of extraordinary events butchered the stock price. Here is a quick recap,
Alibaba Stock News Timeline (TradingView)
The good news is Alibaba has recently announced steady financials for the June Quarter 2022. Although these weren't fantastic results (flat revenue growth) they were higher than analyst expectations. In addition, the company has continued to buy back stock, after they previously increased their share buyback program from $15 billion to $25 billion for up to a 2-year period. I even discovered a couple of positive catalysts with regards to delisting and the Ant Group. At the time of writing Alibaba's stock is down ~69% from its all-times highs and has now entered deep value territory. In this post I'm going to break down the latest earnings, discuss potential catalysts and conclude with the best strategies for investors.
Alibaba News Timeline (Tradingview)
Tough Quarter but Earnings still Surprised
Alibaba reported revenue of $30.7 billion (206 million RMB) which was flat year over year, but beat analyst expectations by $530 million. Earnings per share also popped to $1.75, which also beat analyst estimates by $0.19. The company's business segments performed in a variety of ways. Its Commerce retail business (Taobao and Tmall) makes up 69% of total revenue at ~$21.9 billion (141.9 million RMB) and dipped by 1% year over year. This was on primarily driven by weaker consumer demand brought on by Covid-19 resurgence and restrictions, which impacted in logistics and supply chains. Commerce Segment Adjusted EBITA also decreased by 14% year over year to $6.5 billion ($44 million RMB) due to declining customer management revenue.
Alibaba Segment Growth (Q123 Financial Report)
The good news is "Direct Sales" revenue increased by 8% year over year to $9.7 billion (65 million RMB), due to growth in Freshippo which is Alibaba's high-tech powered fresh food supermarket and also Alibaba Health.
Going forward, we will focus on growing our wallet share in different consumer segments, instead of pursuing further absolute increase in our user base in China - Alibaba CEO Daniel Zhang (Q123)
Alibaba's fairly new offering Taobao deals, which was launched in 2020 has gained significant popularity among Chinese customers. The App offers consumers a low-cost way to buy high quality products. China has approximately 600 million internet users which are on a low income and thus are looking for affordable ways to upgrade their lifestyle, thus Taobao Deals has a significant runway ahead for growth. Losses for the product have narrowed in the quarter driven by an "optimized pricing strategy".
Taobao Deals (Taobao)
Alibaba's Cloud segment was also an area of positive growth. Revenue was $2.64 billion in the quarter (17.7m RMB), up 10% year over year. This was driven by the digital transformation of financial services, public services and telecommunications industries.
Alibaba is often called the "Amazon of China" and this is not just because of their Ecommerce business. Amazon Web Services (Cloud) is Amazon's fastest growing segment and is the real profit driver for the company. Thus, Alibaba could have a similar opportunity to grow its cloud business in China. China's public cloud revenue isforecastedto more than double in size over the next few years, from $32 billion in 2021 to $90 billion by 2025.
Alibaba's Secret Weapon?
Alibaba also has a secret weapon which is Alipay, and its army of 1.3 billion users. Alipay is owned by Ant Group, which was spun off from Alibaba in 2011 and BABA still owns a 33% stake. Ant Group was set to be the largest IPO ever in 2020 and has a valuation of between $120 billion and $200 billion. If we take a ~$160 billion valuation midpoint for the fintech, this would mean Alibaba's stake is worth approximately $52.8 billion. Given Alibaba's market capitalization is just $250 billion at the time of writing, this means significant upside may be overlooked in the stock by many investors. In addition, the Wall Street Journal reported that Jack Ma (who owns approximately 50.52% of Ant Group) plans to give up control and thus this could result Governance issues being squashed and an IPO then possible which would be a significant catalyst for the stock price.
Buybacks and Balance Sheet
Alibaba has a fortress balance sheet with ~$69.1 billion in cash and short-term investments. The company does have $20 billion in total debt but just $700 million of this is current debt and thus the company is in a strong financial position. Alibaba's management has also been buying back stock, with $3.5 billion worth of shares purchased back in the quarter. The company has a $25 billion buyback program, which doesn't expire till 2024 and thus future buybacks could be a catalyst for the stock.
Advanced Valuation
In order to value Alibaba Stock, I have plugged the latest financials into my advanced valuation model which uses the discounted cash flow method of valuation. I have forecasted 10% revenue growth compounded over the next 5 years, as Covid lockdowns in China start to reduce, supply chain issues ease, and its Cloud segment continued to grow. This may seem optimistic but given the company grew its revenue by 28% in the year 2019 to 2020, I see no reason why they could not achieve a steady 10% growth rate at least.
Alibaba Stock Valuation 1 (created by author Ben at Motivation 2 Invest)
I have also forecasted its operating margin to increase from ~12% to 19% over the next seven years, driven again by growth in the cloud and logistics improvements. In addition, to an increase in the "Share of Wallet" for current customers. For extra accuracy, I have capitalized the company's R&D expenses which has adjusted the operating margin.
Alibaba Stock Valuation 2 (created by author Ben at Motivation 2 Invest)
Given these financials, I get a fair value of $127 per share, the stock is trading at ~$92 per share at the time of writing and is thus at least 28% undervalued. If the company can return to prior revenue growth rates of at least 20%, then of course this valuation will expand to great levels.
As an extra datapoint Alibaba is trading at a forward Price to Earnings Ratio = 12.7, which is ~50% cheaper than its 5-year average. While the company trades at a Price to Sales Ratio = 1.95, which is ~75% cheaper than its 5-year average.
BABA PS Ratiodata byYCharts
Final Thoughts
Alibaba is a dominant Ecommerce company which has a thriving cloud business. A crackdown by Chinese regulators and pressure from US regulators has caused the stock price to get squeezed in the middle like a lemon. Underwhelming earnings reports over the past few quarters have also not helped the stock. However, the company does have a lot of potential to return to prior growth rates. In addition, it's difficult to ignore China's gigantic population of 1.45 billion people which is four times the US population of (329.5 million). Given the stock is undervalued, it looks suitable for a hold.
Source: Seeking Alpha
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