With Regulatory Issues In The Rearview Mirror, Alibaba Appears Cheap At $90

Chinese e-commerce and cloud behemoth Alibaba stock (NYSE:BABA) has gained close to 10% over the last five trading days. There are a couple of factors driving the recent gains. Last week, China’s Central bank imposed fines totaling over $1 billion on Alibaba’s affiliate and digital payment services major Ant Group, while also noting that most of the key issues with financial platform players such as Ant had been addressed, while saying that the domestic tech industry will see “normalized supervision” going forward. This is giving investors confidence that China is winding up its nearly three-year-long crackdown on technology companies, removing a considerable overhang on big Chinese tech stocks such as Alibaba.

However, the stock has returned just about 4% on a year-to-date basis, underperforming the broader technology indices. This is likely to be due to mixed economic data from China and a weaker-than-expected post-Covid-19 reopening of the economy. Declining prices are also becoming a problem in China, as producer prices for the month of June fell at their fastest pace in more than seven years, while consumer prices also appear to be on the verge of entering deflationary territory. Investors have also been a bit concerned about the recent performance of Alibaba’s cloud segment, which saw revenues shrink by about 2% year-over-year during Q4 FY’23.

That being said, we remain positive on Alibaba stock at current levels. At the current market price of about $91 per share, BABA stock trades at under 11x forward earnings, which is reasonable in our view. Alibaba’s recent earnings have come in stronger than expected and the company is also poised to grow revenues by near-double-digit levels over the next two years per consensus estimates. Besides this, Alibaba is in the midst of splitting into six separate units that range from cloud computing services, e-commerce, media, and food delivery, to logistics.  The first business to be spun off is likely to be the cloud unit, which Alibaba estimates will happen by May 2024, via a stock dividend distribution to shareholders. The move could unlock value for the company, as it would reduce the so-called conglomerate discount, and would enable investors to better value businesses individually.

Alibaba’s overall valuation is much more favorable compared to U.S. e-commerce behemoth Amazon, which trades at roughly 80x 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 potential 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 7/12/2023
[2] Cumulative total returns since the end of 2016

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