The risk-reward profile of Alibaba Group Holding Limited (NYSE:BABA) stock is undergoing a shift, presenting attractive opportunities for long-term investors. Despite the prevailing negative sentiment, the company’s business fundamentals are improving while risks are diminishing. In this article, we will discuss recent developments surrounding Alibaba, including updates on Ant Group, the 6.18 festival in China, Jack Ma’s message to business leaders, and a preview of the June quarter. We will also highlight near-term catalysts that could impact the company’s performance and Alibaba stock.
Positive Regulatory Developments
Recently, Ant Group, a subsidiary of Alibaba, was fined RMB 7.1 billion (approximately $1 billion) by regulatory authorities. This marks the end of a multi-year regulatory crackdown on the technology sector in China and brings closure to Alibaba’s fintech company. Ant Group will also need to cease its crowdfunded medical aid service and compensate users, which was discontinued in 2021. While this penalty is substantial, it signifies a positive turning point for the entire internet sector in China, indicating a shift towards more normalized business operations and a favorable regulatory environment.
Fines on Other Financial Companies
In addition to Ant Group, several other financial companies faced fines from regulatory authorities. Companies such as Ping An Bank, PICC Property and Casualty, Postal Savings Bank, and Tencent’s payment platform, Tenpay, were penalized for similar violations related to customer data management and other issues. The authorities have noted that most of the problems within these financial businesses have been rectified, and their focus will now shift to industry-wide regulation rather than individual companies.
Implications and Share Repurchase
The fine on Ant Group and the regulatory crackdown on financial companies are seen as positive signs for the entire internet sector in China. It indicates the easing of the authorities’ strict approach and suggests a more stable and predictable regulatory environment moving forward. Ant Group also announced a share repurchase plan, buying back 7.6% of its share capital at a valuation of $78.5 billion. While this valuation is significantly lower than before its failed IPO in November 2020, it is in line with the corrections seen in the valuations of other tech companies. Alibaba’s stake in Ant is valued at approximately $26 billion, accounting for around 12% of Alibaba’s market capitalization.
Near-Term Catalysts
The near-term catalysts for Alibaba’s stock will likely be event-driven. These include the completion of the financial holding company’s restructuring, a potential Ant IPO announcement (expected within 12 to 18 months), and the spinoff of the cloud business in 2024, which will provide insight into its valuation. These events have the potential to unlock value for Alibaba and serve as drivers for short-term upside.
Improving Fundamentals and June Quarter Preview
While consumption sentiment recovery remains slow, the combination of easier year-over-year comparisons and better-than-expected traction during the 6.18 promotional period is expected to drive higher Gross Merchandise Volume (GMV) growth for Taobao and Tmall in the June quarter. The 6.18 festival witnessed record merchant participation and higher GMV from over 2.6 million small and medium-sized enterprises (SMEs) compared to the previous year. Short-form videos on Taobao saw a substantial increase in daily views, and flagship stores on Tmall Global experienced doubled sales in the first four hours of the festival. Additionally, the international commerce and local consumer services segments are expected to outperform market expectations due to the rebound in Eleme, AliExpress, and Amap services. Moving forward, Alibaba aims to strike a balance between disciplined cost management, scaling back non-core initiatives, and increasing investments in innovation and technology to enhance user engagement and experience.
Jack Ma’s Message
Jack Ma, the founder of Alibaba, recently met with business leaders from Taobao and Tmall Group. He acknowledged the highly competitive landscape faced by Taobao and Tmall, with increasing competition from various formats and competitors such as Pinduoduo and ByteDance’s Douyin. Jack Ma encouraged management to be proactive, innovate, and flatten the organizational structure. He emphasized the importance of product innovation, including the use of AI to add value for SMEs, and adapting to the evolving market environment.
Retail Sales Data
May 2023 data reveals a 17% year-on-year and month-on-month increase in online physical goods sales. Year-to-date online physical sales indicate a 12% growth trend, reflecting the recovery in consumer spending in China. These trends bode well for Alibaba, instilling confidence in better-than-expected performance for the June quarter.
Alibaba Stock Valuation
Alibaba currently trades at a price-to-earnings (P/E) ratio of 10x the next twelve months (NTM) earnings. From a relative valuation perspective, the company appears cheap considering the improved opportunities and reduced risks. The stock offers a compelling risk-reward opportunity as sentiment improves and fundamentals strengthen.
Conclusion
The recent fines on financial platform companies, including Ant Group, mark the end of regulatory probes and investigations. Alibaba’s investment case has significantly improved, with reduced risk and improved fundamentals. While sentiment may only fully recover once the regulatory cloud has cleared, we are nearing the end of this phase. Alibaba’s valuation remains depressed, and the company is well-positioned for a positive future. Cautiously optimistic, the low expectations, better-than-expected business momentum, and solid execution by management suggest a positive outlook for the June quarter. With a focus on revitalizing its business segments, Alibaba aims to defend its competitive position and maximize opportunities through product innovation and technology investment. As the company emerges from regulatory challenges, its risk-reward proposition for Alibaba stock becomes increasingly favorable.
Featured Image: Megapixl
