Alibaba: Major Re-Rating Now Possible

Seekingalpha2023-03-29

SummaryAlibaba announced a major change to its organizational structure yesterday.The break-up could be a major catalyst for Alibaba to re-rate to a higher valuation.Alibaba's shares remain ...

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Hst1980
·2023-03-30
Good
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miker9110
·2023-03-30
Good
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Prosperity88
·2023-03-29
Ok
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HH浩
·2023-03-29
Goid move
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Stingray8
·2023-03-29
Ok
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Since Alibaba has a significant amount of cash per-share and already is undervalued based off of P/E, I believe the corporate announcement could lead to a significant re-rating of Alibaba's shares!Alibaba break-up could be a major catalystAlibaba announced yesterday that it would break up its business and run its units independently. The announcement comes in the context of major headwinds for Alibaba's valuation. Alibaba's shares have languished in the last two years and the Chinese firm has been in desperate need of a major catalyst. I believed that Alibaba could create a catalyst for itself by announcing a bigger stock buyback since the firm earned an average quarterly free cash flow level of $6.7B in the first nine months of FY 2023.One factor that has weighed on Alibaba's shares in the last few years was uncertainty relating to regularly crackdowns on companies that have monopolistic market power. One such company was Alibaba which has suffered the ire of China's regulators when the e-Commerce company received fines for not reporting business transactions to regulators in 2020. The more stringent regulatory framework that resulted in China since the early days of the crackdown in 2020 created significant uncertainty which led to many investors avoiding Alibaba and other Chinese stocks.Additionally, Alibaba has seen a severe slowdown in its growth prospects due to 3-year long brutal COVID-19 lockdown that impacted the country's manufacturing base as much as the consumer. Alibaba's top line growth recovered in the December-quarter, but consolidated top line growth has slowed severely due to lockdowns, slowing consumer spending and overall uncertainty in the e-Commerce sector.ChartData by YChartsJack Ma's return to ChinaIt has been a boost to investor confidence that Jack Ma, Alibaba's founder, has returned to China recently, indicating that China's regulatory crackdown may be over. As I have multiple times in my past work on Alibaba when discussing the firm's prospects in the Chinese e-Commerce market, China's political leadership has no interest in harming the prospects for expansion of its largest and fastest-growing companies, and this includes Alibaba.Cloud could generate valueThe break-up plan was met by excitement, and for good reason. While Alibaba has not released many specifics yet, one business unit that could have an IPO, as an example, is Alibaba's Cloud unit. The business generated 20.2B Chinese Yuan ($2.93B) in the last quarter and it is the fastest-growing business outside of e-Commerce. It is also completely disintegrated from all of Alibaba's other businesses which would make Cloud a key candidate for an IPO... which could fetch a high valuation for the Cloud business. Alibaba Cloud is the fourth-largest cloud provider with a market share of 5%.Source: StatistaSource: StatistaAlibaba Cloud could achieve 90B Chinese Yuan next year which translates to approximately $13B. Many cloud-based companies trade at multiples of sales, given the strong growth prospects the industry provides. If Alibaba Cloud were to be valued at just 4-5 X revenues, which is not an aggressive assumption, than the Cloud business alone could be worth $48-60B... which calculates to 19-23% of Alibaba's current market cap.Source: AlibabaSource: AlibabaBuy Alibaba Before The Split-UpOftentimes, major corporate reorganizations are catalysts for the company's stock. The reason behind this thinking is that stand-alone business units can faster react to market changes, deploy capital more efficiently and generally run the business better as it is closer to the customer. As a result, Alibaba's shares may see a continual upward revaluation as investor confidence returns and investors price in the possibility of higher capital returns after Alibaba splits off certain business. The beauty of a deal with Alibaba is that the Chinese e-Commerce firm is already fundamentally undervalued, absolutely speaking, but also in comparison to its Chinese e-Commerce rivals.ChartData by YChartsAlibaba is valued at a P/E ratio of 11.1 X, but the firm is expected to see solid EPS growth in the next two years and the valuation doesn't consider Alibaba's strong cash position. Alibaba could see an average of 12% annual EPS growth in FY 2024 and FY 2025. The firm also had $29 per share in cash on its balance sheet as of December 31, 2022. If we were to take this cash out of Alibaba's valuation, the e-Commerce company would have an adjusted P/E ratio of 7.8 X. This valuation multiplier factor strong indicates that Alibaba's shares are undervalued.Source: Seeking AlphaSource: Seeking AlphaRisks with AlibabaThe big risk for Alibaba is to do nothing and just sit and wait until investor sentiment improves. A break-up plan, however, is a game-changer and even more drastic than a potential increase in the company's stock buyback... which is what I assumed Alibaba would do given the persistent undervaluation of the company's shares. This could weigh especially on Alibaba's core e-Commerce business which generates the majority of its revenues (close to 70 %) from the Chinese market.Final thoughtsThe break-up plan, though still rather undefined and unspecific, is a major catalyst event that could lead to a recovery of investor confidence and also a re-rating of Alibaba's shares. Alibaba is still very much undervalued, in my opinion, with a P/E ratio of 11.1 X (and this is before cash). Adjusting for cash, Alibaba has an effective P/E ratio of less than 8 X and now a major catalyst event is coming up. I believe investors should consider buying Alibaba before the split as I expect more investor confidence to return as more details about the impending break-up are released to the market. Considering the significant amount of cash-per-share Alibaba has and the excitement a pure-play Cloud IPO could bring, the risk of an investment in Alibaba is quite low, in my opinion!","kind":"news","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":9941886581,"gmtCreate":1680125130343,"gmtModify":1680125133369,"author":{"id":"4140687616160352","authorId":"4140687616160352","name":"Hst1980","avatar":"https://community-static.tradeup.com/news/085f4ba53f56a026e48312644d3813bb","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"4140687616160352","authorIdStr":"4140687616160352"},"htmlText":"Good","listText":"Good","text":"Good","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941886581","repostId":1136933545,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9941817002,"gmtCreate":1680114987707,"gmtModify":1680114991095,"author":{"id":"3568440341211251","authorId":"3568440341211251","name":"miker9110","avatar":"https://static.tigerbbs.com/74c64fa1d597623853f21e898b7d0c13","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3568440341211251","authorIdStr":"3568440341211251"},"htmlText":"Good&nbsp;","listText":"Good&nbsp;","text":"Good","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941817002","repostId":1136933545,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9941895431,"gmtCreate":1680101108324,"gmtModify":1680101112473,"author":{"id":"3569644599778803","authorId":"3569644599778803","name":"Prosperity88","avatar":"https://static.tigerbbs.com/673e75041219828ee5fce0d5b00ebbfe","vip":1,"crmLevel":6,"crmLevelSwitch":1,"idStr":"3569644599778803","authorIdStr":"3569644599778803"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941895431","repostId":1136933545,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9941896900,"gmtCreate":1680099659401,"gmtModify":1680099662999,"author":{"id":"3582015516749888","authorId":"3582015516749888","name":"HH浩","avatar":"https://static.tigerbbs.com/2639351c97027c6f71c4d9729ef216d8","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3582015516749888","authorIdStr":"3582015516749888"},"htmlText":"Goid move","listText":"Goid move","text":"Goid move","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941896900","repostId":1136933545,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9941896033,"gmtCreate":1680099648322,"gmtModify":1680099652279,"author":{"id":"3582101468174801","authorId":"3582101468174801","name":"Stingray8","avatar":"https://community-static.tradeup.com/news/61835c24442db698417e83348c394372","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"3582101468174801","authorIdStr":"3582101468174801"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9941896033","repostId":1136933545,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":59,"commentSize":5,"repostSize":3,"favoriteSize":2,"likeStatus":false,"favoriteStatus":false}}