Alibaba Stock Looks Undervalued At $80 Per Share

Alibaba stock (NYSE:BABA) has declined by close to 11% this year to date, as an anticipated rebound in consumer spending in China following the big Covid-19 unlock earlier this year hasn’t been as strong as anticipated. While China’s GDP grew by 4.5% in the first quarter, Alibaba reported that its domestic e-commerce business saw sales decline by 3% over the most recent quarter (Q4 FY’23) as sales of the company’s flagship Taobao and Tmall operations remained lackluster. Other e-commerce majors in China such as JD.com also saw similar trends. Moreover, Alibaba’s cloud operations – which have typically been the company’s fastest-growing segment – have also been on the decline, with sales falling 2% versus the last year. This was due to the delayed delivery of some hybrid cloud projects as well as a top overseas customer phasing out the use of Alibaba’s cloud services. Alibaba’s overall revenues for Q4 FY’23 also fell short of estimates. While revenues rose by about 2% year on year to RMB 208.2 billion (about $29.3 billion), adjusted diluted earnings stood at RMB 1.34 per share ($0.19), up 35% year on year.

That said, things are likely to get better going forward. The e-commerce business is poised to pick up a bit. The company said that it began witnessing positive domestic growth starting in March after a slow start in the calendar year 2023. Retail sales in China were also up by 18.4% in April and this could have a positive impact on Alibaba. Alibaba is also planning to spin off its cloud division into a separate publicly traded company via a dividend distribution to shareholders. The move could unlock considerable value for shareholders as the unit – which also includes Alibaba’s artificial intelligence operations  – would become one of the few pure-play bets on the trends of cloud computing and generative artificial intelligence.  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 earlier this year.

Moreover, Alibaba’s valuation looks compelling. At its current market price of under $80 per share, Alibaba trades at just about 9x 2024 earnings. This is much more favorable compared to U.S. e-commerce behemoth Amazon, which trades at well over 70x forward earnings, with similar near-term revenue growth projections and a weaker cash flow profile. 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’s valuation at about $135 per share indicating a considerable upside 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 5/31/2023
[2] Cumulative total returns since the end of 2016

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