Alibaba: Don't Fall For This Trap

seekingalpha2023-11-20

Alibaba's Q2 results fell short of expectations, but non-GAAP earnings per ADS surpassed estimates.The bullish catalyst, which was supposed to facilitate BABA’s business processes and enable the ...

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TeslaBoy
·2023-11-20
SeekingAlpha, don't put yourself down writing this article!😂What growth Ebay has? Mono, period!
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lingling07
·2023-11-20
Thanks tmr I will buy!
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3
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sjsjsj
·2023-11-20
Are you really serious?? Or telling us a joke [LOL]
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4
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aaffsmcjje
·2023-11-20
More like racist white people
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3
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Danielng
·2023-11-20
Nice. The more I see this kind of reports, the more I am buying.
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3
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DreamZ85
·2023-11-20
A way to bullshit to sell the stock and you guys buy at a cheaper price
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4
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Alibaba's Q2 Results Weren't That Bad Alibaba Group experienced a 9% stock drop after reporting its second-quarter results, which included revenue of RMB224.79 billion , growing 8.5% year-over-year but falling short of analysts' expectations. But non-GAAP earnings per American depositary share  increased by 21% to RMB15.63 , surpassing estimates. Seeking Alpha News Segment-wise, revenue for Taobao and Tmall Group reached RMB97.7 billion, up 4%, with adjusted EBITDA increasing by 3% to RMB47.1 billion. Alibaba International Digital Commerce Group reported revenue of RMB24.5 billion, a 53% increase, while Cainiao's total revenue grew by 25% to RMB22.8 billion. Local Services Group revenue rose by 16% to RMB15.6 billion. Cloud Intelligence Group generated revenue of RMB27.6 billion, a 2% increase, while its adjusted EBITDA increased by 44% to RMB1.4 billion. The Digital Media Entertainment group reported revenue of RMB5.8 billion, marking an 11% increase, with an impr","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"09988":"阿里巴巴-W","BABA":"阿里巴巴"},"translate_title":"阿里巴巴-SW：不要落入这个陷阱","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"09988":1.1,"BABA":1.1},"content_text":"Alibaba's Q2 results fell short of expectations, but non-GAAP earnings per ADS surpassed estimates.The bullish catalyst, which was supposed to facilitate BABA’s business processes and enable the individual companies to grow faster under conditions of relative independence, has not materialized.Alibaba's low valuation is mainly due to a lack of growth, making it less attractive compared to other companies in the same industry.I still don't see the point of buying the Chinese giant for 7.57x FY2029 P/E to get a 6-year EPS CAGR of 4.1% when I can buy eBay for 6.64x and get a CAGR of 6.6%.I do not recommend investors buy BABA shares, no matter how cheap and promising they may seem at first glance.Robert WayIntroductionI've been covering Alibaba Group Holding Limited (NYSE:BABA) here on Seeking Alpha since September 2021. I started with a 'Sell' rating when Alibaba was trading at $150 per share and upgraded the stock to 'Hold' in December 2021 when the shares started trading at $113. Since then, I've not changed my rating, although BABA kept falling lower.The last time I published my 'Hold' article was at the end of August 2023: At that time, I noted that BABA's attractiveness for Western investors wasn't really changing from a fundamental perspective, despite the obvious undervaluation. As time has shown, that thesis was correct, as the already cheap Chinese tech giant became even cheaper.Seeking Alpha, author's notesOn November 16, 2023, Alibaba published its reports for Q2 FY2024, which had a strong negative impact not only on its own shares but also on the entire tech sector in China. What happened and is it really that bad? Maybe BABA has now become a 'bargain'? Let's figure it out.Alibaba's Q2 Results Weren't That BadAlibaba Group experienced a 9% stock drop after reporting its second-quarter results, which included revenue of RMB224.79 billion ($30.81 billion), growing 8.5% year-over-year but falling short of analysts' expectations. But non-GAAP earnings per American depositary share (ADS) increased by 21% to RMB15.63 ($2.14), surpassing estimates.Seeking Alpha NewsSegment-wise, revenue for Taobao and Tmall Group reached RMB97.7 billion, up 4%, with adjusted EBITDA increasing by 3% to RMB47.1 billion. Alibaba International Digital Commerce Group reported revenue of RMB24.5 billion, a 53% increase, while Cainiao's total revenue grew by 25% to RMB22.8 billion. Local Services Group revenue rose by 16% to RMB15.6 billion.Cloud Intelligence Group generated revenue of RMB27.6 billion, a 2% increase, while its adjusted EBITDA increased by 44% to RMB1.4 billion. The Digital Media Entertainment group reported revenue of RMB5.8 billion, marking an 11% increase, with an improved adjusted EBITDA loss of RMB201 million compared to RMB362 million. The All Other segment, including DingTalk and Intelligent Information Platform, reported stable revenue at RMB48.1 billion and an adjusted EBITDA loss of RMB1.4 billion compared to RMB2.9 billion in the same quarter last year, primarily due to improved operating results from various businesses within the segment.BABA's IR materials [November 2023]Cost trends, excluding share-based compensation (SBC), revealed a decrease in the cost of revenue ratio to 62%, stability in product development expenses (5%), sales and marketing expenses (11%), and a 1% decrease in general and administrative expenses (3%).BABA's IR materials [November 2023]The company repurchased ~$3 billion worth of shares from July 1 to November 15, accounting for 1.3% of total shares outstanding [~18.6 million ADSs]. Free cash flow for the quarter was RMB45.2 billion or $6.2 billion, reflecting a massive 27% increase YoY.During the latest earnings call, the management emphasized 3 priorities for cash deployment in the upcoming quarter: innovation for growth, reducing total shares outstanding through accretive stock repurchases, and rewarding long-term investors via dividends. In addition to the existing $40 billion share repurchase program, Alibaba's board approved an annual cash dividend of US$0.125 per ordinary share or US$1.00 per ADS for fiscal year 2023, totaling ~$2.5 billion, with a payment date expected around January 11, 2024, for ordinary shareholders and January 18, 2024, for ADS holders.As of September 30, 2023, Alibaba maintained a strong net cash position of RMB457.8 billion or $62.7 billion. At the same time, the company's current ratio is 1.94 and the debt-to-equity ratio is only 0.16, which is very low. So BABA's financial strength looks solid with such a low level of debt and good liquidity.But A New Catalyst Is Already A Thing Of The PastI remember a few months ago when the Alibaba bulls were trying to assess the positive impact of the proposed split of the company into different companies. At the time, many thought that BABA would unlock tremendous value for its shareholders if it split into 6 separate companies that would not interfere with each other's potential growth rate.As time has shown, this catalyst was not to prove true: During the earnings call, management announced that Alibaba had decided not to pursue a full spin-off of the Cloud Intelligence Group due to uncertainties caused by US export restrictions on advanced computer chips. That was a surprise to the market - I think this is why the stock fell so sharply after the announcement.The emphasis now is on investing in the core businesses, including Taobao and Tmall Group, for sustainable growth. Alibaba wants to increase its ROIC to double digits in the next few years, focusing on core businesses and ensuring non-core businesses become profitable, potentially monetizing certain investments to increase cash flow.In my subjective opinion, BABA’s problem for a long time was precisely the lack of appropriate growth in the cloud segment. While Google (GOOG), Microsoft (MSFT), and Amazon (AMZN), to which BABA is often compared, continue to grow revenue in their cloud business segments at solid double-digit rates, Alibaba's Cloud is stagnating and losing more and more global market share. AI technologies are an excellent growth driver for this niche, but for some reason, BABA's cloud still refuses to grow even though we keep hearing about AI constantly.From the last earnings call, I realized that Alibaba's future growth will be closely linked to 'Value' segments whose growth will heavily depend on the macroeconomic conditions in China after the post-COVID low-base effect disappears, which has not yet fully materialized.YCharts, author's notesGoldman Sach notes in its October report [proprietary source], that slower growth, coupled with policy uncertainty and geopolitical risks, is lowering China's equity market fair value. However, the report suggests that while these factors are already priced in, investment opportunities lie more in alpha themes than broad market beta.China's GDP will most likely stop growing as before. I assume that Alibaba's already high market penetration in various Chinese markets makes the company's growth more variable, which could justify its current low valuation.Goldman Sachs [October 2023] - proprietary sourceYes, it is hard to believe that the current valuation of the company may be fair: BABA looks extremely undervalued with a P/E ratio for next year of ~8.8x and an EV/EBITDA of ~6.7x.Data by YChartsI think we could easily see price increases of 10-20-30% against this backdrop. But most likely these potential 'rips' will be used by hedge funds to exit their positions, as has happened many times before. But even now that there are no \"rips\" in the Chinese market, hedge funds continue to exit their positions.US and European fund managers have sold a net $1.6 billion of Chinese shares so far this month, following $3.5 billion of outflows in September, data from EPFR Global and Morgan Stanley show.Source: Bloomberg [October 19, 2023]I suggest we return to the burning issue - Alibaba's low valuation. Let's think for a moment about what might explain BABA's current cheapness. You might think that BABA's P/E ratio is probably below 10x due to geopolitics and market overreaction. I will answer you that this is true to some extent, but mainly BABA is cheap because there is no growth (almost). If we take the long-term consensus estimates for earnings per share and the implied P/E ratios, we see that BABA is actually valued slightly higher than eBay (EBAY) today:Author's calculations, Seeking Alpha dataBy overpaying just 2x to BABA's long-term P/E ratio of BABA, you can buy MercadoLibre (MELI), whose EPS is estimated to grow more than 8 times faster over the same period (6 years). Could anyone find 'fairness' in the valuation of the two companies?The Bottom LineI understand that when comparing BABA with MELI, I'm doing a little wrong by comparing companies with different business cycles. But I still don't see the point of buying the Chinese giant for 7.57x FY2029 P/E to get a 6-year EPS CAGR of 4.1% when I can buy eBay for 6.64x and get a CAGR of 6.6% (these 2 companies are roughly in the same business cycle).The bullish catalyst, which was supposed to facilitate BABA’s business processes and enable the individual companies to grow faster under conditions of relative independence, has not materialized. Now I expect Alibaba to constrain itself and have relatively modest growth rates for which it makes no sense to overpay and take a big country risk when there are cheaper analogs in the U.S. (and even more so in emerging markets like Brazil).Yes, Alibaba's financial position is very solid as the company continues to recover operationally and continues to buy shares from the market in large quantities. Therefore, I wouldn't be surprised if the company's shares suddenly rebound strongly. However, this potential recovery in stock price will likely provide an opportunity for the remaining investors to get out.Based on the above, I do not recommend investors buy BABA shares, no matter how cheap and promising they may seem at first glance.Thanks for reading!","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":243522235539552,"gmtCreate":1700490692171,"gmtModify":1700490822333,"author":{"id":"4088928099406900","authorId":"4088928099406900","name":"TeslaBoy","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4088928099406900","authorIdStr":"4088928099406900"},"htmlText":"SeekingAlpha, don't put yourself down&nbsp;writing this article!😂What growth Ebay has? Mono, period!&nbsp;","listText":"SeekingAlpha, don't put yourself down&nbsp;writing this article!😂What growth Ebay has? Mono, period!&nbsp;","text":"SeekingAlpha, don't put yourself down writing this article!😂What growth Ebay has? Mono, period!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/243522235539552","repostId":2384589323,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":243519553536064,"gmtCreate":1700490034401,"gmtModify":1700490038770,"author":{"id":"3558267776429365","authorId":"3558267776429365","name":"lingling07","avatar":"https://static.tigerbbs.com/a369ade3411ab47e0d3b0f18ce029e2a","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"3558267776429365","authorIdStr":"3558267776429365"},"htmlText":"Thanks tmr I will buy!","listText":"Thanks tmr I will buy!","text":"Thanks tmr I will buy!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/243519553536064","repostId":2384589323,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":243519168040976,"gmtCreate":1700489928814,"gmtModify":1700489934212,"author":{"id":"4110855522753532","authorId":"4110855522753532","name":"sjsjsj","avatar":"https://community-static.tradeup.com/news/5b28fa3a14f65b1818e59048a05a22ed","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"4110855522753532","authorIdStr":"4110855522753532"},"htmlText":"Are you really&nbsp;serious?? Or telling us a joke&nbsp;[LOL]&nbsp;&nbsp;&nbsp;","listText":"Are you really&nbsp;serious?? Or telling us a joke&nbsp;[LOL]&nbsp;&nbsp;&nbsp;","text":"Are you really serious?? Or telling us a joke [LOL]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/243519168040976","repostId":2384589323,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":243517342048440,"gmtCreate":1700489499780,"gmtModify":1700489907677,"author":{"id":"3557887424829909","authorId":"3557887424829909","name":"aaffsmcjje","avatar":"https://static.tigerbbs.com/0fcb01cf792998a6ce47337ae22c20b9","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3557887424829909","authorIdStr":"3557887424829909"},"htmlText":"More like racist white people&nbsp;","listText":"More like racist white people&nbsp;","text":"More like racist white people","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/243517342048440","repostId":2384589323,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":243516316098560,"gmtCreate":1700489370842,"gmtModify":1700489375243,"author":{"id":"3567242381966976","authorId":"3567242381966976","name":"Danielng","avatar":"https://community-static.tradeup.com/news/5cd5b4aefd2b0994474d489d4d1c2904","vip":1,"hat":"https://static.tigerbbs.com/4c5ceab71416b120bab4604c0754b52a","crmLevel":7,"crmLevelSwitch":1,"idStr":"3567242381966976","authorIdStr":"3567242381966976"},"htmlText":"Nice. The more I see this kind of reports, the more I am buying.","listText":"Nice. The more I see this kind of reports, the more I am buying.","text":"Nice. The more I see this kind of reports, the more I am buying.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/243516316098560","repostId":2384589323,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":243465320009920,"gmtCreate":1700476956866,"gmtModify":1700478695877,"author":{"id":"3577569919471507","authorId":"3577569919471507","name":"DreamZ85","avatar":"https://static.tigerbbs.com/4f88a546cd1787f83e30c21f07ed2b3a","vip":1,"crmLevel":7,"crmLevelSwitch":0,"idStr":"3577569919471507","authorIdStr":"3577569919471507"},"htmlText":"A way to bullshit to sell the stock and you guys buy at a cheaper price","listText":"A way to bullshit to sell the stock and you guys buy at a cheaper price","text":"A way to bullshit to sell the stock and you guys buy at a cheaper price","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/243465320009920","repostId":2384589323,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":24,"commentSize":6,"repostSize":6,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}