Down 40% In The Last 12 Months, Is Alibaba Stock Undervalued At $70 Per Share?

Chinese e-commerce and cloud behemoth Alibaba stock (NYSE:BABA) has considerably underperformed the broader tech indices, declining by about 7% year-to-date and by over 40% over the last 12 months. The company has been weighed down by multiple issues. For one, the Chinese economy has seen a slower-than-expected rebound from the Covid-19 lockdowns, with issues being compounded by weakness in the real estate market. Retail sales in China over 2023 grew by 7.2% year-over-year, compared to 2022 when the number was negative, per the National Bureau of Statistics. Competition in the e-commerce space in China has also been mounting with PDD, the owner of discount e-commerce platforms Pinduoduo and Temu gaining share as Chinese consumers become more value-conscious due to a weak economy. Separately, last November Alibaba also announced that it would be scrapping its plans to spin off its cloud unit, citing that the recent expansion of U.S. restrictions on the export of advanced semiconductor chips was hurting the business. The spin-off was intended to unlock value for investors given that the Cloud segment included the cloud computing and artificial intelligence business, two high-profile and growing businesses. Moreover, the cloud spinoff was seen as a significant step toward Alibaba’s plans of restructuring itself into a holding company via IPOs for its business groups (including e-commerce, media, and food delivery, logistics), in a move that could unlock value. Now the U-turn on the cloud spin-off indicates that things may not be going as expected.

Notably, BABA stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -49% in 2021, -26% in 2022, and -12% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that BABA underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BABA face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

While we have reduced our price estimate for Alibaba stock from $123 per share to about $102 per share, due to the above-mentioned headwinds, we think the stock looks undervalued at levels of about $69 per share. There are some indicators that the regulatory troubles that Alibaba faced relating to its affiliate and digital payment services major Ant Group over the last few years are now in the rearview mirror. Alibaba paid sizable fines relating to this in 2021, with China’s Central Bank noting in 2023 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 tech stocks such as Alibaba. Alibaba is also tweaking its e-commerce strategy to be more like value-focused players such as Pinduoduo. For instance,  Taobao now offers a “refund only” policy that allows customers to keep products they purchased but had complained about for not matching the product description on the site. Pinduoduo has had this option in place for a few years now. Alibaba also appointed one of its founding members to lead Taobao and Tmall Group last month to oversee changes to the business.  Alibaba’s valuation is also compelling. At the current market price of about $69 per share, BABA stock trades at about 7.5x forward earnings, which is very fair in our view, given that the company is likely to see high single-digit growth levels over the next two fiscal years. Alibaba’s overall valuation is much more favorable compared to U.S. e-commerce behemoth Amazon, which trades at roughly 45x forward earnings, with only marginally higher near-term revenue growth projections. 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 $102 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.

[1] Returns as of 1/23/2024
[2] Cumulative total returns since the end of 2016

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