Alibaba Stock: A Screaming Buy At <9x P/FCF

Seeking Alpha2023-06-05

SummaryAfter yet another post-ER drop, Alibaba's stock is now as cheap as it was back at the October 2022 lows based on its P/FCF multiple of ~8-9x.With China's economic re-opening not going according...

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King19
·2023-06-05
Have been buying... 👍
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ZackChia
·2023-06-05
No [LOL] [LOL] [LOL] good luck losing money with this shit stock lol.
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7
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MIe
·2023-06-05
Baba upside with rates hikes round corner and China upside
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With economic growth recovery looking sluggish, the surge in Chinese equities off of October lows has reversed to a great extent in recent months. Despite reporting solid financial results for Q4 FY2023, Alibaba's trading multiple has dropped back down to ~8-9x P/FCF (~6-7x EV/FCF), levels last seen in October 2022.Data by YChartsWhile BABA is well off of its recent lows, the stock is just as cheap as it was back at those lows in October 2022. At ~$85 per share, Alibaba currently has a market capitalization of about $218B. If we back out BABA's net cash position of $58B, we get to an enterprise value of $160B for Alibaba. Considering Alibaba's TTM free cash flow of ~$25B (figure quoted from Alibaba's Q4 FY2023 financial report), BABA is trading at a depressed EV/FCF multiple of ~6-7x and a P/FCF multiple of ~8-9x.Data by YChartsIn recent quarters, we have noted positive trends across multiple business segments within Alibaba, and the Chinese tech giant looks all set to re-accelerate revenue growth in the near future. More importantly, Alibaba's free cash flow generation has rebounded spectacularly over the last year or so, and its stock is still dirt cheap due to overblown fears around the Chinese economy and geopolitical tensions with the US. Furthermore, management is using Alibaba's free cash flows to fund aggressive stock buybacks, and given BABA's depressed valuations, I think Alibaba's capital return program has the potential to generate massive shareholder returns over the next few years.In this note, we will take a look at Alibaba's pre-earnings estimates and actual performance in Q4 FY2023. 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?Going into Q4 FY2023 (March 2023) earnings report, Alibaba was projected to record revenues and Normalized EPS of $30.1B and $1.36, respectively. According to Seeking Alpha and several other financial news sites, BABA missed the top line and beat the bottom line estimates.Seeking AlphaHowever, Alibaba's earnings release pegged Q4 FY2023 revenue at $30.31B, which would imply a beat on both top and bottom-line estimates.Alibaba Q4 FY2023 Earnings ReleaseNow, the discrepancy in these numbers is a direct result of different sites using different currency conversion ratios. To avoid any confusion, investors could simply look at Alibaba's figures in the local currency, i.e., RMB. As you can see above, Alibaba's revenue was up 2% y/y to RMB 208.2B (not down 2% y/y, as shown by the USD figures on SA).Seeking AlphaWhile Alibaba's business continues to struggle for growth in a tough macroeconomic environment, (local currency) revenue growth returning to positive territory in Q3 FY2023 and staying in positive territory in Q4 FY2023 (after several quarters of negative growth rates) marks a vital shift in business trends at Alibaba. Now, let's dig a little deeper into Alibaba's quarterly results.BABA Stock Key MetricsIn Q4 FY2023, Alibaba's consolidated revenues grew by a meager +2% y/y in constant currency, with robust growth in International Commerce (+29% y/y), Local Consumer Services (+17% y/y), and Cainiao (+18% y/y) getting offset by weakness in China commerce (-3% y/y) and Cloud (-2% y/y) businesses.Alibaba Q4 FY2023 Earnings PresentationNow, I understand that Alibaba's current sales growth is uninspiring; however, BABA's management is making tremendous progress on the margin (profitability) front by optimizing costs across their business. In Q4 FY2023, BABA's adj. EBITA margin improved by 400 bps to 12% from a year-ago period. And this margin improvement, in combination with positive sales growth, is driving Alibaba's free cash flows higher.In Q4 FY2023, Alibaba produced $4.7B in free cash flow. And Alibaba's TTM FCF now stands at ~$25B. With cash flows rebounding rapidly, Alibaba's management is performing aggressive stock buybacks (~$1.84B in Q4 FY2023) and improving its fortress-like balance sheet, with net cash balance rising to $58B by the end of Q4 FY2023.Alibaba Q4 FY2023 Earnings PresentationAlibaba Q4 FY2023 Earnings PresentationDuring recent earnings conference calls, Alibaba's leadership has highlighted its efforts to unlock shareholder value, and this talk has been followed up via actions such as aggressive stock repurchases, cost optimizations, and business re-organization into several independent units.Here are some key remarks from the Q4 FY2023 earnings release:In an increasingly complex world, we have proactively transformed our organization to strengthen the competitiveness of our businesses through greater independence to address the evolving needs of different customers and capture new opportunities. We are taking concrete steps towards unlocking value from our businesses and are pleased to announce that our board has approved a full spin-off of the Cloud Intelligence Group via a stock dividend distribution to shareholders, with intention for it to become an independent publicly listed company. - Daniel Zhang, Chairman and Chief Executive Officer of Alibaba Group We have established a capital management committee at the Alibaba board level to undertake a comprehensive capital management plan to enhance shareholder value. Alibaba is committed to improving shareholders return through the implementation of a robust capital allocation framework. We are delighted to share that our board has approved the process to start external financing for Alibaba International Digital Commerce Business Group; exploration of IPO for Cainiao Smart Logistics Group; and execution of IPO for Freshippo. - Toby Xu, Chief Financial Officer of Alibaba GroupClearly, Alibaba's management remains committed to its promise of unlocking shareholder value. On the back of an economic re-opening [after the end of draconian zero-COVID policies] and fresh monetary stimulus from PBOC, China's economic growth is projected 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 $133.5B in revenue over the next twelve months (FY2024) and then deliver high-single-digit revenue growth in FY2025 and FY2026.Alibaba Revenue Estimates (SeekingAlpha)Alibaba Earnings Estimates (SeekingAlpha)As I see it, Alibaba is a fundamentally-sound business that is set to be a massive beneficiary from China's economic re-opening and any fresh stimulus from the government!What To Expect After Earnings?Before last week's bounce, Alibaba's stock had declined by ~15% in the aftermath of its Q4 FY2023 earnings release in pre-market hours on 18th May 2023. This latest post-ER sell-off saw BABA test a key support level at $77-78 in recent trading sessions. As you can see, Alibaba stock held this level and bounced up ~6% in the last couple of trading sessions.Now, if the stock manages to break out of the descending triangle [marked in purple on the chart below] to the upside (>$90), I see Alibaba stock rallying up to the $120 level (top end of its Stage-I base formation) in quick order. Furthermore, an upside breakout above $120 would represent a qualified \"Inverse Head & Shoulders\" pattern, and the price objective for this formation is roughly $180.Alibaba Stock Chart (6/2/2023) (WeBull Desktop)On the flip side, if Alibaba's stock reverses again and fails to hold the $77-78 level, the stock will likely break down back to the lower end of its Stage-I base at ~$70.In my view, the near to medium-term risk/reward based on technicals is skewed to the upside, and the setup is highly favorable for investors/traders looking to go long BABA at current levels.Now, let's take a look at Alibaba's quant factor grades.Since my last update (three months ago), BABA's Quant Rating score has improved from 3.45/5 to 4.67/5. This improvement has been driven by a positive upgrade in \"Momentum\" [C to C+] and \"Growth\" [D to C], partially offset by a negative downgrade in \"Revisions\" [B+ to C+].Alibaba Quant Factor Grades (SeekingAlpha)Over three months, Alibaba's \"Profitability\" and \"Valuation\" quant factor grades have held up at \"A+\" and \"C+\", respectively. While I agree with most of these grades, I think BABA's valuation is very attractive, and this grade could easily climb up to an \"A\" or \"A+\" in upcoming quarters.As of writing, Alibaba is a \"Strong Buy\" based on SA's Quant Rating System. Furthermore, Seeking Alpha and Wall Street analysts are in agreement with my bullish outlook for Alibaba.Concluding Thoughts: Is BABA Stock A Buy, Sell, or Hold?After yet another post-ER pullback, Alibaba's stock is sitting at a key support level. While Alibaba is struggling to find revenue growth amid economic doldrums in China, BABA's management has made several shareholder-friendly moves in recent months, including cost optimization efforts across the business (improving profitability and cash flow generation), enhancement of Alibaba's capital return program, and business reorganization (breakup into six different units announced in Q1). In my view, all of these moves are set to power a recovery in Alibaba's stock over the coming 12-18 months, with the stock currently trading at a depressed EV/FCF multiple of just ~6-7x.Here are my fair value and expected return estimates for Alibaba:TQI Valuation Model (TQIG.org)As you can see above, Alibaba is worth ~$178.5 per share or $462B, i.e., it is currently undervalued by more than ~50%.Assuming a conservative exit multiple of ~15x P/FCF (a \"China\" discount is embedded into this assumption), Alibaba's stock could be trading at ~$430 five years from now (by 2028). This price target implies a 5-yr CAGR return of ~38.6% from current levels.TQI Valuation Model (TQIG.org)Considering the asymmetric risk/reward on offer, I continue to view Alibaba as an incredible investment opportunity! Today, investing in Chinese equities is probably riskier than in most other foreign markets due to heightened geopolitical tensions with the US and economic problems within China. However, in Alibaba, investors are being handsomely compensated for taking on this risk. At ~8-9x P/FCF (~6-7x EV/FCF), Alibaba is a no-brainer buy.Key Takeaway: I rate Alibaba a \"Strong Buy\" in the $80s.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":184117370093712,"gmtCreate":1685974374479,"gmtModify":1685974378781,"author":{"id":"4088135301967120","authorId":"4088135301967120","name":"King19","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":7,"crmLevelSwitch":0,"authorIdStr":"4088135301967120","idStr":"4088135301967120"},"htmlText":"Have been buying... 👍","listText":"Have been buying... 👍","text":"Have been buying... 👍","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":11,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/184117370093712","repostId":2341040026,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":184116252553360,"gmtCreate":1685974101642,"gmtModify":1685975071343,"author":{"id":"4088465576185570","authorId":"4088465576185570","name":"ZackChia","avatar":"https://static.tigerbbs.com/90f82bfb7f8bb1e887247a1d0c7bef93","vip":1,"crmLevel":3,"crmLevelSwitch":0,"authorIdStr":"4088465576185570","idStr":"4088465576185570"},"htmlText":"No&nbsp;[LOL]&nbsp;[LOL]&nbsp;[LOL]&nbsp;good luck losing money with this shit stock lol.&nbsp;","listText":"No&nbsp;[LOL]&nbsp;[LOL]&nbsp;[LOL]&nbsp;good luck losing money with this shit stock lol.&nbsp;","text":"No [LOL] [LOL] [LOL] good luck losing money with this shit stock lol.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":7,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/184116252553360","repostId":2341040026,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":184101248577544,"gmtCreate":1685970480560,"gmtModify":1685970485333,"author":{"id":"3577182936341023","authorId":"3577182936341023","name":"MIe","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/f84d87792f02cf78e80ee34979fd31e5","crmLevel":6,"crmLevelSwitch":0,"authorIdStr":"3577182936341023","idStr":"3577182936341023"},"htmlText":"Baba upside with rates hikes round corner and China upside&nbsp;","listText":"Baba upside with rates hikes round corner and China upside&nbsp;","text":"Baba upside with rates hikes round corner and China upside","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":10,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/184101248577544","repostId":2341040026,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":88,"commentSize":3,"repostSize":4,"favoriteSize":2,"likeStatus":false,"favoriteStatus":false}}