Alibaba Financial thesis
One of the biggest businesses in China is Alibaba, and its stock has had a difficult couple of years. The corporation purchased back a sizable portion of its shares in the most recent quarter, and shares currently trade around 12x earnings.
Recently, Alibaba made headlines after the SEC added it to a list of businesses that could be delisted. Due to the company’s low valuation, significant buyback program, and long-term growth potential, I remain quite bullish on it.
Earnings
Alibaba released its Q1 2023 earnings report on Thursday. The largest segment’s revenue growth was somewhat negative, but given the lockdowns that some areas of China experienced throughout the quarter, I don’t find it all that shocking.
The revenue for the other noteworthy sector, the cloud segment, increased by 10% year over year. I’m interested to see how the e-commerce segment performs in next quarter, but I believe the cloud segment will be able to post consistent revenue increases.
Another reason I consider the valuation to be so low is that a simple look at the balance sheet reveals that Alibaba still has a sizable amount of cash and short-term investments ($67.6B) on hand. The buyback figures for the quarter were the other important item I was searching for in the earnings release.
Alibaba spent almost $3.5 billion to repurchase 38.6 million ADRs during the quarter. There is $12 billion left in the $25 billion repurchase program, which will end in March 2024. The buyback is a sizable return of money to shareholders when compared to Alibaba’s $253 billion market valuation, and once the current buyback program is through, I wouldn’t be shocked to see another one.
S.S.D.D.
I came to the title of the essay last week thanks to a recent news headline I read on Alibaba. The SEC placed Alibaba on a list for possible delisting last week, which caused the business to make headlines. When I was purchasing shares, I considered it to be a possibility, but I don’t believe it will actually happen. The company has declared that they will work to maintain both its Hong Kong and NYSE listings.
Alibaba said in a statement submitted to the Hong Kong stock exchange on Monday that “Alibaba will continue to monitor market developments, comply with applicable laws and regulations and strive to maintain its listing status on both the NYSE and the Hong Kong Stock Exchange.”
According to regulations that state a business will be required to delist if it spends three years without complying with audit procedures, the company stated that the fiscal year that concluded on March 31, 2022, was its first “non-inspection” year.
Some have hypothesized that the company’s pursuit of a primary listing on the Hong Kong exchange, which is anticipated to be completed by the end of the year, maybe the cause of the likely delisting. Even though I’ve said it before, I think it’s important to reiterate that Alibaba ADRs can be converted into shares on the Hong Kong exchange.
Additionally, I’ve started to hear rumors that the Ant Group IPO may be restarted now that Jack Ma, the founder of Alibaba, is rumored to no longer have ownership in Ant. My opinion of the company hasn’t changed, but I’m interested to watch how the next several years with Ant Group turn out.
Valuation
Alibaba is still inexpensive even if you’re only considering its core activities, even though the balance sheet and Ant subsidiary should be taken into account when valuing the company. Alibaba’s valuation is currently 12x earnings. Although I don’t predict that we will immediately reach the average multiple of 29.6x, I do believe that multiple growths to some extent is more likely than not.
My base case is that Alibaba will make more money in the fiscal years 2024 and 2025 than it will this year, despite the fact that it is difficult to predict how much a complicated corporation with several operating sectors will earn in the future. Although the sentiment is difficult to quantify, I believe that sentiment will likely have a significant impact on future returns. It caused a significant selloff, and whenever it turns, I believe it will cause a rally.
Conclusion
Despite the complexity of Alibaba’s risk profile, I still believe that the upside risk outweighs the downside reward. The corporation announced mixed financial results, with essentially unchanged revenue and reduced profits. With $12 billion remaining on the repurchase program, the business still has $3.5 billion in stock to buy back.
The SEC later added the company to its list of Chinese companies that could be delisted, so the bad news kept coming. Even while I continue to think that conclusion is extremely unlikely, investors should nonetheless take it into account.
Featured Image: Megapixl @Cpenler.
