Summary
- After a customary post-earnings drop, Alibaba's stock has given up nearly 50% of its rally off of October-lows.
- On paper, Alibaba appears to be a fundamentally-solid stock that's trading at just ~12x P/FCF.
- Furthermore, we will run Alibaba through TQI's Quantamental Analysis process to see if the pullback in BABA stock is a good buying opportunity for long-term investors.
- Spoiler Alert: I rate Alibaba a "Strong Buy" in the $80s.
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Introduction
Despite reporting an earnings beat last week, Alibaba Group Holding Limited (NYSE:BABA) has seen its stock drop by more than 5% in a couple of sessions to deepen the recent reversal in Chinese stocks. As you may already know, Chinese equitieshave experienced a significant surge off of their October lows, with the likes of Alibaba doubling in a matter of months. However, the wind seems to be blowing in the opposite direction now, with many of these Chinese stocks pulling back down.
Data byYCharts
After rallying from $60 in October to $120 in January, Alibaba has surrendered roughly 50% of this rally, with BABA stock now trading at ~$89 per share or ~$232B in market capitalization. Is this pullback a buying opportunity?
Data byYCharts
In this note, we will take a look at Alibaba's pre-earnings estimates andactual performance in Q4. Additionally, we will discuss key business metrics for BABA and review its valuation, technicals, and quant factor grades to see if it is a good buy at current levels.
What Were Alibaba's Expected Earnings? Did It Beat Earnings?
Heading into FQ3 2023 (December 2022) earnings report, Alibaba was expected to post revenues and Normalized EPS of $35.79B and $2.40, respectively. And as you can see below, BABA beat on both top and bottom line estimates. While the quantum of revenue beat is minimal, I think the sizeable earnings beat was a positive surprise.
SeekingAlpha
That said, Alibaba's business continues to suffer in a tough macroeconomic environment. China's zero-COVID policies have led to a sharp economic slowdown in the second-largest economy in the world, and Alibaba's FQ3 2023 numbers clearly reflect the pain.
SeekingAlpha
Despite beating street expectations on top and bottom lines, Alibaba's revenue (in USD) still contracted by -6.5% y/y in FQ3 2023. Now, let's dig a little deeper into Alibaba's quarterly results.
BABA Stock Key Metrics
In constant currency, Alibaba's revenues grew by 2% y/y in FQ3, with International Commerce and Cainiao (Alibaba's logistics and supply chain services business) showing robust growth rates of 18% and 27%, respectively.
Alibaba December Quarter 2022 Presentation
While Alibaba's growth is uninspiring, the company's progress in optimizing margins across its business has been tremendous. In FQ3 2023, BABA's adj. EBITA margin improved by 300 bps to 21% from a year-ago period. And this margin improvement is driving higher free cash flows.
In the recently concluded quarter, Alibaba's free cash flow jumped up by ~15% (in constant currency). With its free cash flow rebounding, Alibaba is executing aggressive stock buybacks (~$3.5B in FQ3 2023) and improving its fortress-like balance sheet (net cash position has improved to $55B). Please note that Alibaba's share repurchase authorization still has ~$21B remaining.
Alibaba December Quarter 2022 Presentation
On the back of the economic re-opening [after the end of draconian zero-COVID policies] and fresh monetary stimulus, China's economic growth is expected to recover in coming quarters, with the International Monetary Fund projecting China's GDP growth to reach +5.2% in 2023. As the macroeconomic backdrop improves in China, Alibaba's improving business trends could get even better in the near future.
According to consensus analyst estimates, Alibaba is set to record $126B in revenue for this fiscal year (FQ4 2023 included) and then deliver double-digit revenue growth over the next couple of years.
SeekingAlpha
In my view, Alibaba is a fundamentally-sound business that is set to be a massive beneficiary from China's economic re-opening! On the earnings call, Alibaba's management alluded to rising consumer and business confidence in China while painting a positive view of BABA's business environment for the foreseeable future.
What To Expect After Earnings?
Despite a better-than-expected quarterly report, Alibaba's stock has plunged by more than 5% in a couple of sessions as the stock continues to reel from a rejection off of the top end of the Stage-I base pattern (range: $70 to $120) it has traded in over the last year or so.
While Alibaba's stock should find some support at or near the $90 mark, a failure to hold current levels could result in a re-test of the lower end of its base in the low $70s. Personally, I think a continuation of the downside move in Alibaba is unlikely, as improving business fundamentals support an upside move back up to $120 (and beyond). Technically, Alibaba is in no trade zone, and hence, I would avoid any short-term positions at this counter. It is a different story for long-term investors, and we will get to it in just a bit.
WeBull Desktop
After the recent run-up in Alibaba's stock, its momentum factor grade has improved from "C-" to "C+". And as we know, a positive trend in momentum factor grade is a potential sign of a turnaround in the stock.
SeekingAlpha
With profitability and growth factor grades holding up, Alibaba's stock could ride the momentum train higher. Furthermore, Alibaba's fundamentals are likely to rebound in the coming 4-8 quarters (indicated by a favorable "B+" grade for Revisions). Hence, I view Alibaba's current quantitative factor grades favorably, despite an overall rating of 'Hold' [3.45/5] on SA's Quant Rating System. My fellow SA authors and Wall Street analyst seem to agree with my bullish outlook for Alibaba.
Is BABA Stock A Buy, Sell or Hold?
Concluding Thoughts
After a significant pullback in its stock, BABA is trading right in the middle of a Stage-I base. While Alibaba is still not growing as rapidly as investors would like it to grow, management is optimizing costs (improving profitability and cash flow generation) and enhancing shareholder capital return programs.
At ~$89 per share, Alibaba currently has a market capitalization of about $232B. If we back out BABA's net cash position of $55B, we get to an enterprise value of $177B for Alibaba. Assuming an annual FCF of $20B (Alibaba achieved this figure in the last nine-month period), BABA is trading at just ~9x EV/FCF. With positive trends seen across multiple business segments within Alibaba, the Chinese tech giant could re-accelerate revenue growth in the near future. And in that scenario, Alibaba's stock looks dirt cheap at these levels. Furthermore, Alibaba's management is using free cash flows to execute aggressive stock buybacks, and I think Alibaba's capital return program has the potential to generate massive shareholder returns over the next few years. Hence, I continue to like Alibaba at its current levels.
Source: Seeking Alpha
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