Alibaba: Spin-Offs As Catalyst To Unlock Value (Rating Upgrade)

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Alibaba: Spin-Offs As Catalyst To Unlock Value (Rating Upgrade)

Seekingalpha2023-05-31

Up until this day, Alibaba (NYSE:BABA) is one of the worst investments and continues to be a disappointment. Looking back at the last two years, I bought BABA stock way too early and probably was ...

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YuTC968
·2023-05-31
Buy some lo[Happy] [Happy]
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MOCHAMAD
·2023-05-31
Hare
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Superdaddy88
·2023-05-31
Time to make generational wealth
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Looking back at the last two years, I bought BABA stock way too early and probably was ...</p>\n\n<a href=\"https://seekingalpha.com/article/4608336-alibaba-baba-spin-offs-catalyst-unlock-value\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Alibaba: Spin-Offs As Catalyst To Unlock Value (Rating Upgrade)</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAlibaba: Spin-Offs As Catalyst To Unlock Value (Rating Upgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2023-05-31 21:04 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4608336-alibaba-baba-spin-offs-catalyst-unlock-value><strong>Seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Up until this day, Alibaba (NYSE:BABA) is one of the worst investments and continues to be a disappointment. 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Looking back at the last two years, I bought BABA stock way too early and probably was catching a falling knife. In the last two years, I also wrote six articles about Alibaba and in every single article I have been bullish.Despite this horrible performance, I remain bullish about Alibaba and see the stock as one of the great long-term investments the market is offering right now. So far, Alibaba was in a bear market for “only” 2.5 years. Of course, in a time when the stock market seems to be in an internal bull market and market participants assume the stock market will always go up (like it has since 2009), a 2.5-year bull market seems to be an extreme outlier – but it really isn’t.In the following article, I will – once again – explain why I am long-term bullish about Alibaba and continue to hold the stock.ResultsWe start by looking at the results, which can be seen from many different angles. For starters, Alibaba could beat expectations for revenue as well as non-GAAP earnings per share. And while exceeding expectations is good news, we also should keep in mind that estimates have constantly been lowered over the last few quarters making it easier for Alibaba to exceed expectations.Alibaba: Consensus EPS Revision Trend (Seeking Alpha)When looking at the actual full-year results, Alibaba could increase revenue from RMB 853.1 billion in the previous year to RMB 868.7 billion in fiscal 2023 resulting in 1.8% year-over-year growth. And while revenue could grow only slightly, income from operations increased 44.1% year-over-year from RMB 69.6 billion in fiscal 2022 to RMB 100.4 billion in fiscal 2023. And finally, net income increased from RMB 47.1 billion in fiscal 2022 to RMB 65.6 billion in fiscal 2023 – resulting in 39.3% year-over-year growth.Alibaba Q4/23 PresentationBut of course, we must keep in mind that we are comparing to particularly worse year for Alibaba making it easier to report high growth rates for operating income and earnings per share. Instead, we also look at the adjusted numbers. Adjusted EBITDA increased from RMB 158.2 billion in fiscal 2022 to RMB 175.7 billion in fiscal 2023 – resulting in 11.1% year-over-year growth. And non-GAAP diluted earnings per share increased from RMB 6.59 in fiscal 2022 to RMB 6.82 in fiscal 2023 – resulting in 3.5% year-over-year growth.But Alibaba saw its growth rates slow down to what can only be described as a “hard landing”. In fiscal 2022 – one year earlier – Alibaba could grow its top line still 19%, which was already much lower than in the previous years. And Alibaba is struggling to grow right now, which is a disappointment.Intrinsic Value CalculationHowever, we always must put the numbers into perspective and compare it to the current share price and ask ourselves if the price is justified. Although Alibaba moved away a little bit from its previous all-time low, it is still trading clearly below its all-time high. And especially the price-free-cash-flow ratio of only 7.5 is a clear statement for Alibaba being undervalued.Data by YChartsAside from the price-free-cash-flow ratio, we can also use a discount cash flow calculation to determine an intrinsic value for Alibaba. As basis for our calculation, we take the free cash flow of fiscal 2023, which was $24,966 million (I will use the numbers in USD as I will also compare the intrinsic value to the Alibaba quotation in USD). When using 2,610 million outstanding shares and a 10% discount rate, we get an intrinsic value of $95.66 for Alibaba – even when assuming that the company won’t be able to grow its free cash flow ever again.And although Alibaba is already undervalued in this calculation, 0% growth is extremely unrealistic. Instead, let’s still be cautious and assume that Alibaba will remain a low growth company forever and grow only 3% annually from now till perpetuity. This would result in an intrinsic value of $136.55 and make Alibaba clearly undervalued.But more realistic assumptions would be to assume at least 6% growth from now till perpetuity as Alibaba has – in my opinion – a wide economic moat around its business that will keep competitors at bay. When calculating with 6% growth, we get an intrinsic value of $239.14 for Alibaba.I am basically just repeating what I already wrote in previous articles. Alibaba is deeply undervalued. And even when we have to expect the worst and assume that Alibaba will remain a low growth company from now till perpetuity, the stock is still deeply undervalued, and we are looking at a bargain.Breaking Up The BusinessThe biggest news story about Alibaba in the last few months was the announcement on March 28, 2023 of Alibaba’s new organizational and governance structure. Under the new structure, Alibaba Group will remain the holding company of the six major business groups – and each of the six major business groups will be managed independently by its own chief executive officer.And five of the six major business groups will have the flexibility to raise external capital and potentially seek its own initial public offering. The only exception is Taobao & Tmall Group, which will remain a wholly-owned subsidiary by Alibaba Group. The other five business groups will be: Cloud Intelligence Group, Local Services Group, Alibaba International Digital Commerce Group, Cainiao Smart Logistics Network Limited as well as Digital Media and Entertainment Group.As a result of this new organizational structure, we will also see several IPOs in the next 12 to 18 months. The first spin-off (and potential IPO) will be of the Cloud Intelligence Group (see section below). Additionally, Alibaba is pursuing its IPO plan for Cainiao Smart Logistics within the next 12 to 18 months. Right now, Alibaba holds a 67% equity interest. And finally, within the next 6 to 12 months we can also expect the IPO of Freshippo (Hema), Alibaba Group’s proprietary retail chain for groceries and fresh goods with about 275 self-operated stores.Annual Report 2022Basically, Alibaba is breaking up its business into the six business segments it was already reporting in. Nevertheless, it is a major difference and might be a good strategic move – and can be interpreted once again as a strategy to please the authorities. Although the six businesses will remain part of the Alibaba Group, they are each individual corporations and appear less monopolistic (which seems to be rather in line with the Chinese government’s policy goals). JPMorgan Chase analysts even see a philosophical strategy change in the case of Alibaba.Cloud Intelligence GroupThe first – and one of the major – spin-offs will be that of that Cloud Intelligence Group. Additionally, the Cloud Intelligence Group intends to become an independent publicly listed company and investors in Alibaba will receive shares in the new business. The spin-off is expected to be completed within the next 12 months.For fiscal 2023, the cloud business reported only mediocre results. The segment generated RMB 77,203 million and compared to RMB 74,568 million one year earlier, this is resulting in 3.5% year-over-year growth. And such a growth rate is certainly a disappointment. The cloud business of major competitors – in China as well as the United States – also sees lower growth rates, but its peers especially in the United States still see much higher growth rates. And the segment is still not profitable as it reported a loss from operations of RMB 5,161 million (only adjusted EBITA was a positive amount of RMB 1,422 million).However, long-term growth expectations are positive. While Alibaba is clearly lagging the three dominant companies in the global cloud market – Amazon (AMZN) AWS, Microsoft (MSFT) Azure, and Google (GOOG) Cloud – it is the biggest player in China and has a global market share around 4%.StatistaBut even if Alibaba should not be able to offer its cloud services successfully on an international basis, we can still expect high growth rates in China. According to Statista, public cloud revenue will increase from around $54 billion in 2023 to $121 billion in 2027 – resulting in a CAGR of 22.23%.StatistaI would still expect that the new Cloud Intelligence Group has the potential to grow at a high pace and I also expect the business segment (and later the stand-alone business) to be profitable soon.Growing E-commerceBut not only the cloud business will contribute to growth in the years to come. Alibaba’s ecommerce business (which is responsible for most of its revenue) should also be able to grow in the years to come. And although the China ecommerce business had to report a year-over-year decline, growth expectations for the coming years are in high single digits (or sometimes even double digits). It could be problematic for China if its population will actually shrink in coming years and decades (as many predict), but I believe the continuous rise in the country’s standard of living over time will lead to a higher disposable income and people being able to spend more and more money over time.Insider IntelligenceAnd while it is difficult to predict how successful Alibaba will be in offering its cloud services in countries outside of China, it has already managed to establish its ecommerce businesses outside of China. Especially for Lazada in Southeast Asia growth expectations are high. And in fiscal 2022, “Total International Commerce” could increase revenue from RMB 61,078 million in 2022 to RMB 69,204 million in 2023 – resulting in 13.3% year-over-year growth. And especially in the fourth quarter of fiscal 2022, growth accelerated again, and Alibaba could report 41% YoY growth for the business segment.Insider IntelligenceShare BuybacksAside from focusing on top line growth, Alibaba is also continuing to buy back shares, which is a good idea as long as the stock remains deeply undervalued (and in my opinion it is deeply undervalued). During the last quarter, Alibaba repurchased 21.5 million ADSs (the equivalent of 172.4 million ordinary shares) for about $1.9 billion. Alibaba is repurchasing shares with high levels of consistency and decreased the diluted number of outstanding shares from 22,024 million at the end of March 2021 to 21,401 million at the end of March 2022 and 20,882 million at the end of March 2023.The company still has approximately $19.4 billion remaining under the current share repurchase authorization (effective through March 2025) and in my opinion Alibaba should be more aggressive in its share buybacks. As I have pointed out in my last two articles, Alibaba might also consider using parts of its cash, cash equivalents and short-term investments to repurchase shares at this point. As of March 31, 2023, Alibaba had RMB 193.1 billion in cash and cash equivalents (resulting in $28,115 million) as well as RMB 326.5 billion in short-term investments (resulting in $47,541 million). With a current market capitalization of $217 billion, this is enough to repurchase almost 35% of outstanding shares.ConclusionI mentioned above that Alibaba is even undervalued when we don’t assume any growth ever again. But such an assumption is extremely unrealistic for several different reasons. Not only will the cloud and ecommerce business most likely continue to grow at least in the high single digits, but the company can also continue to repurchase shares and therefore adding to bottom line growth. And – although this is rather speculation at this point – breaking up the business in six parts might also turn out to be a smart move by management. Therefore, the conclusion has to be once again: Alibaba is deeply undervalued!Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"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":182404501663792,"gmtCreate":1685541421227,"gmtModify":1685541426462,"author":{"id":"3568898592347932","authorId":"3568898592347932","name":"YuTC968","avatar":"https://static.tigerbbs.com/2d421272489b6ef78e6ec097b142ae78","vip":1,"crmLevel":5,"crmLevelSwitch":1,"authorIdStr":"3568898592347932","idStr":"3568898592347932"},"htmlText":"Buy some lo[Happy]&nbsp;[Happy]&nbsp;","listText":"Buy some lo[Happy]&nbsp;[Happy]&nbsp;","text":"Buy some lo[Happy] [Happy]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/182404501663792","repostId":2339255952,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":182399219388432,"gmtCreate":1685540360613,"gmtModify":1685540614495,"author":{"id":"4143360142995722","authorId":"4143360142995722","name":"MOCHAMAD","avatar":"https://community-static.tradeup.com/news/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0,"authorIdStr":"4143360142995722","idStr":"4143360142995722"},"htmlText":"Hare","listText":"Hare","text":"Hare","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/182399219388432","repostId":2339255952,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":182393949962248,"gmtCreate":1685538995870,"gmtModify":1685539000170,"author":{"id":"3555116903223574","authorId":"3555116903223574","name":"Superdaddy88","avatar":"https://static.tigerbbs.com/c4069bf67e51505aa83ef3020756113f","vip":1,"crmLevel":8,"crmLevelSwitch":1,"authorIdStr":"3555116903223574","idStr":"3555116903223574"},"htmlText":"Time to make generational wealth&nbsp;","listText":"Time to make generational wealth&nbsp;","text":"Time to make generational wealth","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/182393949962248","repostId":2339255952,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":26,"commentSize":3,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}