With a $247.56 billion market cap, Alibaba Group Holding Limited (BABA) is one of the leading retail chains in China. The company operates through seven segments: China Commerce; International Commerce; Local Customer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
With the easing of regulatory measures on the technology sector and China’s reopening after the lifting of its COVID-19 restrictions, Wall Street analysts are bullish on Chinese tech firms, including BABA, even though recovery seems uneven. BABA missed its first-quarter revenue expectations, but revenue grew 2% year-over-year.
The Chinese e-commerce giant’s domestic commerce unit declined 3% year-over-year during the first quarter, while the cloud business was 2% down, indicating concerns that a Chinese consumer spending rebound may not be as strong as anticipated. However, analysts expressed optimism when BABA announced its restructuring plans.
On March 28, BABA announced that it would reorganize into six independent business groups, a plan designed to unlock shareholder value. The six business units include Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, Global Digital Commerce Group, and Digital Media and Entertainment Group.
BABA is restructuring its digital empire to adapt to the changes in the technology industry. This strategic move marks the most significant governance overhaul in the company’s history of 24 years and positions all its businesses to promote innovation to capture market opportunities.
“This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes,” said Daniel Zhang, BABA’s CEO, in an email to employees.
The company further gave more details on the restructuring plan in the recent financial report. “We are delighted to share that our board has approved the process to start external financing for Alibaba International Digital Commerce Business Group; exploration of IPO for Cainiao Smart Logistics Group; and execution of IPO for Freshippo,” said Toby Xu, Chief Financial Officer of Alibaba Group.
Shares of BABA have gained 5% year-to-date to close the last trading session at $96.61. However, the stock has plunged 17.4% over the past six months.
Here is what could shape BABA’s performance in the near term:
Positive Recent Developments
On May 25, Alibaba Cloud, BABA’s digital technology and intelligence backbone, and MongoDB, Inc. (MDB) announced a four-year extension to their strategic partnership that has witnessed significant growth since being announced in 2019. With this partnership, customers can easily adopt and consume MongoDB-as-a-service, ApsaraDB for MongoDB, from Alibaba Cloud’s data centers globally.
In April, Alibaba Cloud launched its latest large language model (LLM), Tongyi Qianwen. The company plans to integrate new LLM into all business applications across its ecosystem in the near future to enhance user experience further.
In addition, Alibaba Cloud recently endorsed various actions to make computing more accessible and affordable. The company announced a new instance family that offers the same level of stability and provides up to 40% of cost savings. It reduced the prices of some of its core utility products, including storage, computing, networking, and security, by up to 50%.
These initiatives might increase public cloud adoption nationwide and boost the company’s growth and profitability.
Mixed Financials
For the fourth quarter that ended March 31, 2023, BABA’s revenue increased 2% year-over-year to $30.32 billion. However, its revenue from the China Commerce segment declined 2.9% from the year-ago value to $19.81 billion. Also, the company’s income from operations decreased 9.7% from the prior-year quarter to $2.22 billion.
Furthermore, BABA’s adjusted EBITDA came in at $4.68 billion, an increase of 37.4% year-over-year. Its non-GAAP net income grew 38.3% year-over-year to $3.99 billion, and its non-GAAP earnings per share were $0.20, up 35.4% year-over-year. Also, the company’s cash inflows from operating activities came in at $4.57 billion for the quarter.
Mixed Historical Growth
Over the past three years, BABA’s revenue and EBITDA grew at 19.5% and 1.6% CAGRs, respectively. Also, its total assets increased at a CAGR of 10.1% during the same period. But the company’s net income and EPS declined at CAGRs of 21.3% and 21.1% over the same time frame, respectively.
Favorable Analyst Estimates
Analysts expect BABA’s revenue for the second quarter (ending September 2023) to come in at $31.34 billion, representing an increase of 8.3% year-over-year. The consensus EPS estimate of $2.04 for the ongoing quarter indicates a 12.8% year-over-year increase. Moreover, the company has surpassed the consensus EPS estimates in each of the trailing four quarters.
In addition, BABA’s revenue and EPS for the fiscal year (ending March 2024) are expected to increase 7.3% and 9.7% year-over-year to $132.49 billion and $8.51, respectively. Also, analysts expect the company’s revenue and EPS for the fiscal year 2025 to grow 9.2% and 11.1% year-over-year to $144.63 billion and $9.45, respectively.
Robust Profitability
BABA’s trailing-12-month gross profit margin of 36.72% is 4.2% higher than the 35.24% industry average. The stock’s 16.62% trailing-12-month EBITDA margin is 52.8% higher than the industry average of 10.88%. Moreover, its 8.38% trailing-12-month net income margin is 99.6% higher than the industry average of 4.20%.
Furthermore, the stock’s trailing-12-month levered FCF margin of 12.85% is 254.1% higher than the industry average of 3.63%.
Mixed Valuation
In terms of forward non-GAAP P/E, BABA is currently trading at 11.35x, 26.4% lower than the industry average of 15.43x. The stock’s forward Price/Book of 1.56x is 40.6% higher than the industry average of 2.63x. Likewise, its forward EV/EBITDA multiple of 8.25 is 15.1% lower than the industry average of 9.72.
However, BABA’s forward EV/Sales of 1.65x is 37.1% higher than the industry average of 1.20x. The stock’s forward Price/Sales multiple of 1.87 is considerably higher than the industry average of 0.90.
POWR Ratings Show Uncertainty
BABA’s mixed fundamentals are reflected in its POWR Ratings. The stock’s overall C rating translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BABA has a B grade for Quality, consistent with its higher-than-industry profitability. However, the stock has a grade of C for Growth, in sync with its mixed growth record.
In addition, BABA has a C grade for Value, justified by its mixed valuation.
BABA is ranked #20 out of 44 stocks in the B-rated China industry.
Beyond what I have stated above, we have also given BABA grades for Growth, Stability, and Momentum. Get access to all BABA ratings here.
Bottom Line
With the easing of regulatory measures and the reopening of the Chinese economy, tech giant BABA saw signs of recovery across its businesses, as indicated in the first quarter and fiscal year 2023 results. However, the company’s recovery looks uneven as it missed the first-quarter analyst revenue estimates.
Nevertheless, analysts seem optimistic about BABA’s long-term growth as the company announced the restructuring and split into six different business groups. This strategic move might “unlock the value” of its various businesses and drive market competitiveness.
Given BABA’s mixed financials, mixed valuation, and dim near-term growth outlook, we think it could be wise for investors to wait for a better entry point in this Chinese stock.
Stocks to Consider Instead of Alibaba Group Holding Limited (BABA)
Given its uncertain short-term prospects, the odds of BABA outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the China industry instead:
NetEase Inc. (NTES)
LexinFintech Holdings Ltd. (LX)
Tarena International, Inc. (TEDU)
What To Do Next?
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BABA shares were trading at $95.73 per share on Friday morning, down $0.88 (-0.91%). Year-to-date, BABA has gained 8.67%, versus a 18.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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