As Chinese regulatory authorities began cracking down on digital businesses and potential growth disruptors arose, Alibaba (NYSE:BABA) and its share price have been in a whirlwind atmosphere. After about a year, there are hints that the crackdown is easing, as regulatory authorities have taken a step back and are now focused on firms breaching certain business practices, which Alibaba mostly does not engage.
However, once the company’s share price had steadied, US regulatory authorities began reviewing Chinese-owned firms listed on US-based exchanges for possible delisting. This sent the company’s stock price down to levels seen during the Chinese crackdown.
Overall, there are dangers connected with this investment, and any investment in a business being scrutinized may be delisted. Still, the payoff is easily worth the risk at this moment.
Here are some of the reasons why.
Revenue Growth Is Steady
As evidenced by their 650-page 20-F (foreign business counterpart of 10K), Alibaba has so many income sources and programs that it would take several articles to review. However, I believe that numerous revenue streams account for a sizable amount of their future growth chances. Let’s get started.
The first is their cloud business. While cloud computing continues to replace a substantial percentage of the world’s traditional IT infrastructure, the firm is focused on not just optimizing its cloud business in the People’s Republic of China but also looking at foreign markets, notably in Eastern Asia and the Asia-Pacific region as a whole, to sustain and develop this business.
The second segment is the retail and commerce business. I understand that these two company divisions account for most of their revenues. Still, they also account for the majority of their expansion potential. Allowing merchants in other Asia-Pacific nations to sell their items and manage their small companies across the region and around the world is a tremendous gain. As these nations grow into economic powerhouses, the corporation will reap the rewards of these early investments.
What It Means For 2030(ish)
According to analyst estimates aggregated by Seeking Alpha, Alibaba Group is projected to report higher revenues by about 63% by 2028, rising from $134 billion, the projected figure for this upcoming year, to just shy of $218 billion.
This represents a CAGR (compound annual growth rate) of 10.2% over the next five years regarding the company’s revenues. Translating that to earnings shows how the company’s investments will pay off while they continue to work on expanding their per-user revenues, which drives profits.
Over the same period, the company is projected to report a 94% bump in EPS, rising from $7.34 in the upcoming fiscal year to $14.29 in 2028. This represents a CAGR of 14.2% over the next five years.
There are a few reasons for this, the most important being margin expansion.
Interest Expense Control
As interest rates climb worldwide, Alibaba is leveraging its cash reserves to curb debt growth and restructure current debt to reduce total interest expenditure. Even though the company’s overall debt payments and interest expenses are almost negligible in comparison to its income, focusing on this now could save them several billions of dollars per year over the next decade, which could be used to increase shareholder value and compete for new users in new international markets.
After peaking at $612 million in interest expenditure in 2018, the corporation has gradually dropped annually. It has mainly stayed stable since they presently have roughly $20.6 billion in long-term debt. It currently pays $504 million in interest expenses. From 2020 to 2021, the corporation added a sizable debt, increasing from just under $17 billion to almost $20.7 billion. To escape the increasing interest rate environment, they have refinanced part of that debt and attempted to obtain funds in more profitable ways.
Because the firm has a huge cash pile, I feel they can continue to strive to lower their debt pile to assist with value. Still, given the low overall interest rate they pay, it’s not as important as long as it doesn’t significantly grow.
Conclusion – Cheap & Valuable
Given that the comparison mentioned above to Amazon finds that, based on current predictions, Alibaba is poised to spend the next year somewhat overvalued in contrast to Amazon, it will spend the next three at a substantially lower one. This is before my anticipated outperformance in foreign growth initiatives and margin improvement from trying to enhance per-user revenue sources.
The longer-term expectations remain, but that is where I anticipate Alibaba to excel if its foreign margins match its home margins. I predict that by 2028, the firm will have outperformed its current revenue and earnings per share estimates by around 20% and 15%, respectively, suggesting a possible 13% annual increase in revenues and 16% increase in EPS over the next five years of the company’s development strategy.
I am enthusiastic about Alibaba and will continue to increase my stake over the next few weeks if the share price remains unchanged.
Featured Image : Megapixl © Minipig5188
