Alibaba Stock’s Low Relative Valuation, Strong Earnings Make It A Buy

Alibaba stock (NYSE:BABA) posted a better-than-expected set of Q3 FY’23 results despite relatively weak macroeconomic conditions and Covid-19-related supply chain and logistics disruptions over the quarter. Revenues rose by 2% year-over-year to RMB 247.7 billion ($35.9 billion). The core Chinese e-commerce business saw revenues decline by 1% year-over-year driven by soft consumer spending and likely due to mounting competition from rivals such as JD.com and newer entrants. Moreover, the cloud business – which is typically the company’s fastest-growing unit – grew by just 3% versus last year as overall spending on cloud computing slows globally following a big jump through Covid-19. However, Alibaba’s adjusted diluted earnings per American Depository Share rose 14% to RMB 19.26 ($2.79) driven by improving operating efficiency and cost optimization.

So is Alibaba stock worth a look following earnings? At its current market price of about $90 per share, Alibaba trades at just about 12x 2023 earnings. While this is up from a multiple of just about 9x last November, we still believe this is reasonable. China has been scaling back on its stringent zero Covid-19 policy and the big re-opening should bode well for e-commerce players such as Alibaba which are intertwined with the broader Chinese economy. Moreover, there have been signs that the regulatory headwinds facing the company could ease after some positive regulatory outcomes for the company’s financial services affiliate Ant Group. Moreover, Alibaba’s valuation is more favorable compared to U.S. e-commerce behemoth Amazon, which trades at well over 50x forward earnings, with similar near-term growth projections. Although the risks for Chinese stocks are typically higher given the regulatory and political concerns, we still believe that such a large difference in valuation may not be warranted. We estimate Alibaba valuation at about $122 per share indicating a potential upside of 37% over the market price.  See our analysis of Alibaba revenues for more details on how Alibaba’s revenues are likely to trend.

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[1] Month-to-date and year-to-date as of 2/26/2023
[2] Cumulative total returns since the end of 2016

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