Alibaba Stock (NYSE:BABA)
Alibaba (NYSE:BABA) announced impressive earnings for the December 2022 quarter, driving up the price of the stock by as much as 8% in pre-market trading. Notably, Alibaba delivered a massive earnings beat, reporting net income for the period of 46.82 billion yuan as opposed to the expected 34.02 billion yuan (also, net income is up approximately 69% as compared to the same period in 2021). This was done against the backdrop of China’s COVID reopening trade, combined with continued OPEX discipline.
I revise my EPS projections for Alibaba through 2025 in anticipation of a rapid economic recovery in China, and I now arrive at a fair implied price of $138.65 per share. I reiterate a rating of “Buy”.
For comparison, the S&P 500 has lost roughly 7% over the past year, while Alibaba stock has fallen about 16%.
December Quarter 2022
Alibaba’s Q3 FY 2023 results were robust, outperforming analyst consensus projections in terms of both revenue and earnings. The Chinese e-commerce behemoth made sales of roughly 247.8 billion yuan from September to the end of December, compared to $242.6 billion yuan for the same period last year (2% year over year growth), and compared to $245.2 billion yuan expected by experts (according to data collected by Bloomberg)
Alibaba’s operational income, which measures profitability, increased by 396% from the previous year to 35 billion yuan. Diluted earnings per share increased by 76%, from $1.24 in Q3 2021 to $2.24 in Q3 2022, above analyst expectations by nearly 40 cents.
Revenue from Alibaba’s main profit center, “China commerce,” which also includes the well-known online market Taobao, was 169.99 billion yuan, a decrease of around 1% from the previous year. It goes without saying that a contracting business is bad. Nonetheless, the outcomes are also not poor, especially in light of China’s (previous) macroeconomic difficulties.
Compared to the prior year, Alibaba’s cloud revenue climbed by around 3%, reaching 20.18 billion yuan, or nearly 8% of the group’s overall revenue. Although revenue growth is encouraging, investors should take into account that it has slowed significantly from the rates surpassing 30% observed in prior quarters.
Reopening in China Encourages A Positive 2023
The relaxation of zero-COVID limits will let the Chinese economy quickly and sharply recover. With that context in mind, investors should keep in mind that the economic and financial gain will manifest in 2023’s Q1 and Q2 quarters.
In light of this, Alibaba CEO Daniel Zhange expressed optimism that economic fundamentals will improve until 2023: “Looking ahead, we expect a continued recovery in consumer sentiment and economic activity”.
Alibaba’s optimism for a macroeconomic revival is consistent with remarks made by Baidu (NASDAQ:BIDU), which released financial results on February 22: “… we expect this recovery trend to continue and boost our online marketing revenue through increased demand and take advantage of pent-up consumption in China. We also anticipate resuming cloud project implementation as business operations return to normal, signing new contracts and accelerating AI cloud revenue growth”.
By comparison, Goldman Sachs predicts that China’s economy would rise by 4.5% in 2023, while Morgan Stanley predicts that GDP will grow by 5.4% in 2023, compared to only about 3.3% in 2022.
Investors need to take into account that the analyst consensus predictions for Alibaba’s FY 2024 (and beyond) are still low, making expectations open to positive surprises.
Target Price: Up to $138.65
I predict that Alibaba’s EPS in 2023 will likely increase to somewhere between $8.4 and $8.6 since I anticipate a significant economic recovery in China. Also, I increased my forecast for EPS for 2024 and 2025 to $9.30 and 10.10, respectively.
I’m still basing my projections on a 4% terminal growth rate (one percentage point higher than the estimated nominal global GDP growth). Nonetheless, I drop my cost of capital need by 75 basis points, to 11.25%, which still represents a very low-risk premium but should reflect reduced risk as a result of COVID’s reopening and the lessening of regulatory pressure.
I have now determined a reasonable implied share price of $138.65 in light of the EPS increases that are indicated below.
The potential that China’s reopening process is slower than anticipated or that the government reconsiders its stance on reopening is the biggest risk I see for Alibaba shares going into 2023. In contrast to my predictions and estimates, such a situation would surely erode Alibaba’s fundamentals.
However, investors should not totally ignore the other risk considerations associated with investing in China, such as the different political risk hotspots, the ongoing real estate crisis, and the structural economic slowdown.
I feel secure in restating my positive thesis on Alibaba stock in light of a good FY 2023 Q3 report. In fact, with the COVID reopening in China providing the business with a significant fundamental tailwind, Alibaba is anticipated to continue to outperform analyst projections for earnings in 2023.
I have now determined that the reasonable implied share price for BABA is $138.65, taking into account revised EPS predictions, a terminal YoY growth rate of 4%, and a cost of equity of 11.25%. “Buy.”
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