Alibaba: Undervalued Or Underwhelming?
Alibaba: Undervalued Or Underwhelming?

Alibaba: Undervalued Or Underwhelming?

Thu, Aug 29, 2024 4:18 PM

Back in 1999, Jack Ma founded Alibaba. Today, the Chinese company has grown into a multinational conglomerate specializing in e-commerce, retail, internet, and technology.  

Alibaba operates various online and mobile marketplaces in retail and wholesale trade, such as Lazada. The company also provides cloud computing, digital entertainment, and other services through its subsidiaries.

It is one of a few dual-listed companies which means you can buy its stock on the Hong Kong Stock Exchange or the New York Stock Exchange (NYSE). In 2014, Alibaba’s IPO on the NYSE raised USD25 billion, which was by far the largest IPO in history at the time.

However, the stock has taken a beating since then — crashing over 75% from its all-time high closing price of USD306.16 on the NYSE. 

According to a Motley Fool analyst though there are two reasons investors should be bullish on Alibaba. 

Growth Drivers 

  • Alibaba remains the largest e-commerce platform in China. 
  • The new management team is working hard to reposition it for the future. 
  • Investors are getting plenty of value with the stock today. 

Recent Quarter Earnings 

Revenue: USD33.47m 
Net Income: USD5.59m 
Adjusted EPS (Earnings Per Share): USD2.26, beating analysts' estimates.

Alibaba’s latest earnings were a mixed bag compared to market expectations.

Over the past year, NYSE: BABA has ranged from USD66.63 – USD101.84. This indicates that the stock has been rather volatile over this period. The stock’s price-to-earnings (P/E) ratio is sitting at 17.70.

This could be interpreted as investors not willing to pay a premium for the stock, but on the other hand, it could be a telling sign that Alibaba is undervalued. But since investors are always looking ahead, does this mean they don’t see growth potential in the stock? 

ALIBABA’S INTERNATIONAL COMMERCE DIVISION 

Alibaba’s International Commerce division, particularly AliExpress’ Choice platform, has shown significant growth at an accelerated average of 32% per annum over the last three years, driven by AliExpress, Trendyol, and Lazada.

Revenue from the International Commerce Retail business, increased by 60% in 2024 mainly attributed to AliExpress’ Choice platform, now representing 70% of AliExpress’ orders. 

ALIBABA’S CLOUD DIVISION 

Alibaba’s Cloud division has been hampered by capacity limitations and is likely to break out eventually as demand for AI services soars. 

The company’s ongoing share buyback program and margin improvements could also drive significant EPS growth.

Besides Choice, Alibaba’s Cloud Intelligence business is another division with immense growth potential. Despite only achieving an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of USD0.8 billion with a 6% margin during FY2024, the unit was already valued at USD40-60 billion before its planned IPO.

This extreme valuation is contributed by the cloud business and has substantial overhead costs, but as revenues increase, the margins are expected to grow significantly. As Alibaba Cloud scales, its profit margins will also rise substantially.

Risks Ahead 
Many of the challenges that Alibaba has faced in the past few years remain today, such as: 

  • Regulatory Environment: Heightened scrutiny from China. 
  • Competition: From other e-commerce giants like JD.com and Pinduoduo. 
  • Economic Conditions: The bearish Hong Kong market, ongoing inflation, and economic slowdowns in key markets have hampered consumer spending and Alibaba’s revenue growth. 
  • Geopolitical Tensions: Ongoing tensions between the US and China could affect Alibaba's international operations and investor sentiment. 

Future Outlook

Our Research team noted that net profit is expected to grow at a CAGR of 7% for the next 3 years, with strong net margins higher than 15% and recommends a BUY with an upside of 34.5%. What is your take on Alibaba, is the stock underwhelming or undervalued?

Trade NYSE: BABA and pay a flat rate RM1 on brokerage. Alternatively, trade HKG: 9988 through the Hong Kong Stock Exchange.