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 * China




ALIBABA: WHY WE ARE BUYING THE BAD NEWS

Nov. 20, 2023 11:42 AM ETAlibaba Group Holding Limited (BABA) StockAMZN, MELI26
Comments9 Likes
Juxtaposed Ideas
9.43K Followers
Follow


SUMMARY

 * BABA's prospects remain excellent, with its two growth drivers, the cloud and
   e-commerce segments, continuing to deliver impressive numbers despite the
   slowing Chinese economy.
 * The recent summit between Biden and Xi is likely to thaw market sentiments
   surrounding Chinese ADRs, especially since the stock already nears its
   lowest-ever recorded P/E valuation of 8.30x.
 * BABA's valuations appear to be extremely cheap across most metrics,
   especially when compared to its e-commerce/ fintech/ cloud peers.
 * With the floor to its decline likely almost here, we believe that these
   levels already offer growth-oriented investors with the chance of a great
   upside potential to the bull-case long-term price target of $162.
 * It goes without saying that the BABA stock is not for the faint-hearted, with
   it remaining to be seen when or if a reversal may occur.

KanawatTH



We previously covered Alibaba Group Holding Limited (NYSE:BABA) in August 2023,
discussing its battleground stock status as it continued to trade at impacted
prices, despite the previously outstanding FQ1'24 results.

While geopolitical issues might remain a headwind, we had rated the stock as a
Buy for long-term investors then, thanks to the potential contribution by
Generative AI to its cloud performance and the potential rerating in its
valuations nearer to its peers.

This article will be focusing on BABA's recent performance in the Cloud and
e-commerce segments since we believe these two segments are the company's
long-term growth drivers.

We will also discuss why we are finally adding here, with the recent summit
between Biden and Xi likely to thaw market sentiments surrounding Chinese ADRs,
especially with the stock already nearing its lowest-ever recorded P/E valuation
of 8.30x.


BABA'S VALUATIONS INDICATE THAT IT IS EXTREMELY CHEAP HERE

For now, BABA has delivered a surprising update in its internal break-up plan,
with the spin-off for the cloud segment scrapped as the US government widened
the trade restrictions for Nvidia's (NVDA) AI chips.

While this segment may not be its top and bottom line driver, the company's
Cloud Intelligence Group remains China's largest cloud provider, with 34% of the
market share in Q1'23.

In addition, we have observed a notable improvement on a QoQ basis in BABA's
cloud revenues of 27.64B Yuan (+10% QoQ/ +2.2% YoY) and EBITA of 1.4B Yuan
(+264% QoQ/ +43.6% YoY) in the latest quarter.

This is likely attributed to the robust consumer demand for its cloud computing
services and in-house generative AI capabilities, with the management preferring
to temporarily shelve plans until the IPO market conditions are more favorable.

This was also why Mr. Market had cheered the break-up then, with a fellow
analyst on Seeking Alpha awarding BABA's Cloud segment with an estimated
Enterprise Value of $603B in April 2023, well exceeding the company's current
Enterprise Value of $164.34B.

Interested investors may want to note that a similar observation has been noted
for Amazon (AMZN), which as the leading global cloud market share of 32% as of
Q2'23. A Redburn analyst has previously estimated the AWS to be worth
approximately $3T as a standalone business in the long term, well exceeding the
overall company's Enterprise Value of $1.6T at the time of writing.

For now, BABA's prospects have also been temporarily destabilized by the miss on
the FQ2'24 top-line, with overall revenues of 224.79B Yuan (-3.9% QoQ/ +8.5%
YoY), or the equivalent of $30.81B missing the consensus estimates of $31B.

In this case, the untimely combination of these two poorly received news items
has already triggered a -10.8% plunge in its stock prices over the past week,
despite the announced cash dividends of $1 per ADR, implying a forward dividend
yield of 1.2%.

However, we believe that Mr. Market has over-reacted, due to the robust
expansion in BABA's overall adj EBITA to 42.84B Yuan (-5.5% QoQ/ +18.4% YoY) and
adj EBITA margins to 19% (-0.3 points QoQ/ +1.6 YoY). This naturally contributes
to the expanded adj EPS of 15.63 Yuan (-10% QoQ/ +20.9% YoY) in the latest
quarter.

These numbers imply that the management's drastic cost optimizations have worked
as intended, attributed to the moderation in its global headcounts to 224.95K
employees (-3.72K QoQ/ -18.95K YoY).

Most importantly, investors must not ignore the potential boost BABA may enjoy
from the biggest shopping event of the year, namely the 11.11 Singles' Day in
November 2023.

With Taobao and Tmall Group (domestic e-commerce) comprising the majority of the
company's top and bottom lines at 97.65B Yuan (-15% QoQ/ +4.1% YoY) and 47.07B
Yuan (-4.5% QoQ/ +3.1% YoY) in the latest quarter, or the equivalent of 43.4% of
its top-line, we may see FQ3'24 bring forth excellent results indeed.

This should also build upon the robust top-line growth reported in Alibaba
International Digital Commerce (international e-commerce segment) at 24.51B Yuan
(+10.8% QoQ/ +52.8% YoY) and narrowing losses at -384M Yuan (+8.5% QoQ/ +48.6%
YoY), respectively.

BABA Valuations



Seeking Alpha



As a result of the factors discussed above, BABA's valuations appear to be
extremely cheap across most metrics, especially in its FWD P/E of 8.69x and FWD
Price/ Cash Flow of 7.74x, compared to its 3Y pre-pandemic mean of 28.43x/
25.61x and sector median of 14.78x/ 9.47x, respectively.

The depression in its valuations is even more stark when compared to similar
e-commerce/ fintech/ cloud giants, such as AMZN at 54.40x/ 16.47x and
MercadoLibre (MELI) at 66.17x/ 50.26x, respectively.

For now, the BABA stock's depressed valuations are understandably attributed to
Mr. Market's wary sentiments surrounding Chinese ADRs, on top of the previous
regulatory crackdown across multiple sectors, slowing Chinese economy, and the
trade war between China and the US.

The Consensus Forward Estimates



Tikr Terminal



However, we believe that the discount observed in BABA's stock is unwarranted
since the company is expected to generate robust top and bottom line growth at a
CAGR of +9.4% and +13.2% through FY2026.

Most importantly, the company continues to grow its net cash position to $56.95B
(+6.7% QoQ/ +20.1% YoY) by the latest quarter, thanks to its robust annualized
Free Cash Flow generation of $24.12B (+14.2% QoQ/ +22.8% YoY).

The healthy balance sheet and growing profitability have allowed the BABA
management to execute excellent shareholder returns, with 103M of shares retired
since FY2019, naturally leading to its expanding book value per share of $55.87
(+1.9% QoQ/ +10% YoY).

Even if the stock's FWD P/E stays stagnant here, there is still an excellent
upside potential of +22.8% to our base-case long-term price target of $95.32 as
well, based on the consensus FY2026 adj EPS estimates of $10.97.


SO, IS BABA STOCK A BUY, SELL, OR HOLD?

BABA 2Y Stock Price



Trading View



For now, the uncertainty surrounding Chinese ADRs has previously led to a
massive sell-off between late 2020 and early 2022, with the BABA stock
drastically losing -74.3% of its value since the November 2020 peak and
currently retesting its critical support level in the $75s.

Assuming that bullish support fails to materialize, we may see the correction
continue, with the stock likely to return to its October 2022 bottom range in
the $65s.

However, we believe herein lies the opportunity to dollar cost average, since
the BABA stock is extremely undervalued here, compared to its peers based in the
US and Argentina.

Thanks to the show of cooperation between Biden and Xi in the recent summit, we
believe that there is hope for a slow but steady thawing in market sentiments,
especially since the stock is already near its lowest-ever recorded P/E
valuation of 8.30x.

With the floor to its decline almost here, we believe that these levels already
offer growth-oriented investors the chance of great upside potential to the
bull-case long-term price target of $162.13, assuming a future rerating in its
FWD P/E valuations nearer to the sector median of 14.78x.

As a result of the attractive risk-reward ratio, we maintain our Buy rating for
BABA here, with us also finally initiating a small position at these levels.

It goes without saying that the stock is not for the faint-hearted, attributed
to the headwinds discussed above.



Therefore, BABA is only suitable for investors with higher risk tolerance and
long-term investing trajectory. Even then, they must also size their portfolios
accordingly, since bullish support has yet to materialize, with it remaining to
be seen when or if a reversal may occur.



This article was written by

Juxtaposed Ideas
9.43K Followers
Follow
I am a full-time analyst interested in a wide range of stocks. With my unique
insights and knowledge, I hope to provide other investors with a contrasting
view of my portfolio, given my particular background.Prior to Seeking Alpha, I
worked as a professionally trained architect in a private architecture practice,
with a focus on public and healthcare projects. My qualifications include:-
Qualified Person with the Board of Architects, Singapore.- Master's in
Architecture from the National University of Singapore.- Bachelor in Arts from
the National University of Singapore.If you have any questions, feel free to
reach out to me via a direct message on Seeking Alpha or leave a comment on one
of my articles.
Show more
Show more

Analyst’s Disclosure: I/we have a beneficial long position in the shares of
BABA, NVDA, AMZN, MELI either through stock ownership, options, or other
derivatives. I wrote this article myself, and it expresses my own opinions. I am
not receiving compensation for it (other than from Seeking Alpha). I have no
business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not
be considered professional investment advice. Before investing, please conduct
personal in-depth research and utmost due diligence, as there are many risks
associated with the trade, including capital loss.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results.
No recommendation or advice is being given as to whether any investment is
suitable for a particular investor. Any views or opinions expressed above may
not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed
securities dealer, broker or US investment adviser or investment bank. Our
analysts are third party authors that include both professional investors and
individual investors who may not be licensed or certified by any institute or
regulatory body.



Like (9)SharePrintComments (26)

RECOMMENDED FOR YOU



COMMENTS (26)

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R
Ron-a
29 Nov. 2023, 6:20 AM
Premium
Comments (56)
|
+ Follow
How do you analyze the value of the $67B equity investments? Do you consider the
earnings power of those assets or should they be valued separately?
ReplyLike
Murad Shawar
21 Nov. 2023, 11:45 AM
Comments (2.84K)
|
+ Follow
For seeking alpha authors and readers and contributors
CCP plus VIE = Destruction of Chinese equities why would anyone take the risk ?
Loook at all these seekingalpha articles that have been pushing baba for 3 plus
years now and look at the result . BABA isnt a good investment
AMZN/GOOGL/AAPL/MSFT those are good investments . I lost 900$ in 2021 on BABA
but learned a valuable lesson when I learned about CCP/VIE RISK and removed all
china from my watchlist. If I had keept holding ID be down 9000$ and have lost
even more time wasted on this horrible investment . CHINA isnt investable as
long as there is CCP/VIE risks involved . Literally anything else would have
made money withought the same risk . Hopefully seekingalpha authors do the right
thing and help investors steer away from a horrible investment decision .
ReplyLike
a
auroramonk
27 Nov. 2023, 10:54 PM
Premium
Comments (457)
|
+ Follow
@Murad Shawar if Chinese and American tech were at similar valuations then I'd
agree. But valuation matters. I'll take BABA at 5x EV/FCF than American tech at
triple the cost.
ReplyLike
arok79
21 Nov. 2023, 9:46 AM
Comments (5.55K)
|
+ Follow
author needs to do some actual DD on CCP. then come back and try again.
ReplyLike(1)
Murad Shawar
21 Nov. 2023, 11:44 AM
Comments (2.84K)
|
+ Follow
@arok79 CCP plus VIE = Destruction of Chinese equities why would anyone take the
risk ?
Loook at all these seekingalpha articles that have been pushing baba for 3 plus
years now and look at the result . BABA isnt a good investment
AMZN/GOOGL/AAPL/MSFT those are good investments . I lost 900$ in 2021 on BABA
but learned a valuable lesson when I learned about CCP/VIE RISK and removed all
china from my watchlist. If I had keept holding ID be down 9000$ and have lost
even more time wasted on this horrible investment . CHINA isnt investable as
long as there is CCP/VIE risks involved . Literally anything else would have
made money withought the same risk . Hopefully seekingalpha authors do the right
thing and help investors steer away from a horrible investment decision .
ReplyLike
C
CJlove4all
21 Nov. 2023, 9:15 AM
Premium
Comments (3.07K)
|
+ Follow
Can't trust Chinese accounting (not held to same audit/standards as US
companies)or communist totalitarianism culture of private ownership...



Plus, they backed away from cloud....horrible mistake for profits or growth..
ReplyLike(2)
Stup
21 Nov. 2023, 7:58 AM
Comments (38)
|
+ Follow
Which other Chinese stocks aren't cheap in similar Market Cap?
ReplyLike
K
KojiroSan
20 Nov. 2023, 4:42 PM
Comments (6)
|
+ Follow
It is true that the stock is “cheap” at these prices. However, BABA is not the
same company that Jack Ma founded and competition is fierce. The geopolitical
risks and China’s sagging economy makes buying BABA stock a risky wager versus
an investment.
ReplyLike
lloydjamesross
21 Nov. 2023, 1:52 AM
Premium
Comments (38)
|
+ Follow
@KojiroSan free cashflow growth suggests otherwise wouldn’t you say?
ReplyLike(4)
Wu-Tang-Financial
20 Nov. 2023, 4:23 PM
Investing Group
Comments (787)
|
+ Follow
I hate Chinese ADR, I hate the CCP, I hate that I agree that $BABA looks
compelling here though ugh….



I hate that if I don’t buy it’ll probably run to $150, and I hate that if I do
buy it’ll tank and trade sideways and I’ll be kicking myself for breaking my
rules on avoid China
ReplyLike(5)
n
nobullschmidt
21 Nov. 2023, 8:31 AM
Premium
Comments (14)
|
+ Follow
@Wu-Tang-Financial C.R.E.A.M.
ReplyLike
kimboslice
21 Nov. 2023, 9:13 AM
Comments (3.81K)
|
+ Follow
@Wu-Tang-Financial Don't buy it, because I want to sell my shares at any price
over $100 ;)
ReplyLike(1)
Ed Grey
01 Dec. 2023, 3:19 PM
Comments (3.6K)
|
+ Follow
@Wu-Tang-Financial That's the George Costanza dilemma.



Think of it as a casino where you're doing fine counting cards at blackjack, but
at any moment the place could get raided and you'll have to leave your chips
behind.



Certainly the odds of that happening are much, much higher with Alibaba than
with, say, Berkshire Hathaway. :)
ReplyLike
See More Replies
g
grandherve
20 Nov. 2023, 2:52 PM
Comments (315)
|
+ Follow
Companies under Communist supervision deserve p/e ratios of no more than seven,
whether they grow or not. It is stated in no uncertain terms that
non Chinese holders can have their stock certificates cancelled at any time.
Sleep well on that one.
ReplyLike(2)
B
Bemylov
20 Nov. 2023, 12:08 PM
PremiumInvesting Group
Comments (2.24K)
|
+ Follow
I remember when the share price used to be $270. What a loss for those buyers
ReplyLike(3)
n0obInvestor
20 Nov. 2023, 1:14 PM
Comments (137)
|
+ Follow
@Bemylov and even then some were calling it undervalued
ReplyLike
B
Bemylov
20 Nov. 2023, 2:34 PM
PremiumInvesting Group
Comments (2.24K)
|
+ Follow
@n0obInvestor Yep!! I remember it well. Imagine, if you had bought at $270? Glad
l stayed from it.
ReplyLike
C
Clark158f1
20 Nov. 2023, 4:07 PM
Investing Group
Comments (5.92K)
|
+ Follow
@Bemylov



No kidding. I got excited about BABA when they were going to IPO ANT.



Originally bought near $ 300 BUT fortunately sold for a small profit and never
bought again until it had tanked well below $ 80.



I think BABA is dead money here until septimate changes in China and we see its
markets start to rebound. No idea when that could be.



At some point Chinese markets will recover and the BABA spinouts will be done
but it may be a long long time.
ReplyLike(3)
See More Replies
M
Muath87
20 Nov. 2023, 12:06 PM
Premium
Comments (93)
|
+ Follow
Well written, thanks
ReplyLike
Juxtaposed Ideas
20 Nov. 2023, 8:46 PM
AnalystPremium
Comments (3.32K)
|
+ Follow
@Muath87 Thank you for the kind words.
ReplyLike
R
RB Gambler99
20 Nov. 2023, 12:05 PM
Premium
Comments (267)
|
+ Follow
Agree...I own BABA and buy on all dips below 80...parts are worth the sum of the
whole, and its a great bet on China getting its act together....Xi will
stimulate until the economy gets moving higher on its own.
ReplyLike(7)
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ABOUT BABA STOCK

SymbolLast Price% Chg
BABA
Alibaba Group Holding Limited
72.17-0.21%Post72.200.04%

 * 1D
 * 5D
 * 1M
 * 6M
 * 1Y
 * 5Y
 * 10Y
 * 

Created with Highcharts 11.3.0Jan '24Dec '23Nov '23Oct '23Sep '23Aug
'235075100125
Market Cap
$181.29B
PE (FWD)
8.06
Yield (TTM)
1.38%
Rev Growth (YoY)
6.46%
Short Interest
2.05%
Prev. Close
$72.32
Compare to Peers



MORE ON BABA


CHINESE TECH STOCK TRADE HIGHER, WHILE US MEGA CAPS SEE RED AFTER QUARTERLY
RESULTS




ALIBABA: DON'T FOLLOW JACK MA - WHY I'M GIVING UP (RATING DOWNGRADE)

Julian Lin


ALIBABA INTRODUCES SERVERLESS SOLUTION TO USE GEN-AI TOOLS FOR ENTERPRISES




ALIBABA: CANNOT BE UNDERVALUED FOREVER

KM Capital


TRENDING ANALYSIS




TRENDING NEWS






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