Over the past two years, the Chinese e-commerce giant Alibaba Group Holding Limited (BABA) has dealt with approximately $2.8 billion in fines by regulators in China for monopolistic behavior, the country’s declining economic growth, and a rush of new e-commerce competitors.
However, this year, China’s reopening after the lifting of COVID-19 restrictions and further easing of regulatory woes are doing wonders for the e-commerce major. Moreover, BABA recently announced a major reorganization, splitting its company into six business units to unlock shareholder value. Given its solid fundamentals and promising growth outlook, I think BABA is an ideal buy now.
In this article, I will discuss several reasons why I am extremely bullish on BABA.
Headquartered in Hangzhou, China, BABA is a leading technology company specializing in e-commerce, retail, Internet, and technology. It provides technology infrastructure and marketing reach to help merchants, retailers, and other businesses engage internationally with their users and customers.
The company operates through seven segments: China Commerce; International Commerce; Local Customer Services; Cainiao; Cloud; Digital Media and Entertainment; and Innovation Initiatives and Others.
On March 28, 2023, BABA announced that it would reorganize into six independent business groups, a move designed to unlock shareholder value and foster competitiveness. The six business clusters include Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, Global Digital Commerce Group, and Digital Media and Entertainment Group.
BABA is reorganizing its digital empire to adapt to the changes in the technology industry. “This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes,” said Daniel Zhang, BABA’s CEO, in an email to employees.
This move marks the most significant governance overhaul in the platform company’s history of 24 years and positions all its businesses to promote innovation to capture market opportunities, thereby unlocking shareholder value.
Daniel Zhang announced in the company’s latest earnings report, “We are taking concrete steps towards unlocking value from our businesses and are pleased to announce that our board has approved a full spin-off of the Cloud Intelligence Group via a stock dividend distribution to shareholders, with intention for it to become an independent publicly listed company.”
Alibaba Cloud, the digital technology and intelligence backbone of Alibaba Group, has been committed to the research and development of core technologies of cloud computing, big data, and AI, along with the promotion of computing power and AI.
In April 2023, Alibaba Cloud launched its latest large language model (LLM), Tongyi Qianwen. The company plans to integrate new LLM into all business applications across its ecosystem in the near future to enhance user experience further.
Also, Alibaba Cloud recently endorsed various actions to make computing more accessible and affordable. The company announced a new instance family that offers the same level of stability and provides up to 40% of cost savings. It reduced the prices of some of its core utility products, including storage, computing, networking, and security, by up to 50%.
These initiatives might increase public cloud adoption in China and unlock emerging opportunities to leverage AI technology for enterprises.
Furthermore, the company gave more details on the restructuring plan in the recent quarterly report. “We are delighted to share that our board has approved the process to start external financing for Alibaba International Digital Commerce Business Group; exploration of IPO for Cainiao Smart Logistics Group; and execution of IPO for Freshippo,” said Toby Xu, Chief Financial Officer of Alibaba Group.
Shares of BABA have gained 6.7% over the past six months to close the last trading session at $80.97. Moreover, Wall Street analysts expect the stock to hit $147.79 in the near term, indicating a potential upside of 82.5%.
Here is what could shape BABA’s performance in the near term:
Robust Financials
In the fourth quarter that ended March 31, 2023, BABA’s revenue increased 2% year-over-year to $30.32 billion. Its revenue from the International Commerce segment rose 29% from the year-ago value to $2.70 billion. Also, the company’s adjusted EBITDA came in at $4.68 billion, an increase of 37.4% year-over-year.
Furthermore, BABA’s non-GAAP net income grew 38.3% year-over-year to $3.99 billion, and its non-GAAP earnings per share was $0.20, an increase of 35.4% year-over-year. In addition, the company’s cash inflows from operating activities came in at $4.57 billion for the quarter.
Impressive Historic Growth
BABA’s revenue has grown at a 19.5% CAGR over the past three years. Over the same time frame, the company’s EBIT and total assets have increased at 2.6% and 17.3% CAGRs, respectively.
Favorable Analyst Estimates
Analysts expect BABA’s revenue for the fiscal 2024 first quarter (ending June 2023) to come in at $31.44 billion, representing an increase of 3.2% year-over-year. The consensus EPS estimate of $2.02 for the ongoing quarter indicates a 16.3% year-over-year increase. It’s no surprise that the company has surpassed the consensus EPS estimates in each of the trailing four quarters.
In addition, BABA’s revenue and EPS for the fiscal year (ending March 2024) are expected to increase 8.6% and 9.9% year-over-year to $134.10 billion and $8.52, respectively. Also, analysts expect the company’s revenue and EPS for the fiscal year 2025 to grow 9.3% and 10.9% year-over-year to $146.58 billion and $9.45, respectively.
High Profitability
In terms of the trailing-12-month gross profit margin, BABA’s 36.72% is 4.1% higher than the 35.27% industry average. The stock’s 16.62% trailing-12-month EBITDA margin is 52.8% higher than the industry average of 10.88%. Likewise, its 8.38% trailing-12-month net income margin is 93.3% higher than the industry average of 4.33%.
Furthermore, the stock’s trailing-12-month levered FCF margin of 12.85% is 298.1% higher than the industry average of 3.23%. Also, its trailing-12-month CAPEX/Sales of 3.95% compares with the 3.20% industry average.
POWR Ratings Show Promise
BABA’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BABA has a grade of B for Sentiment, in sync with its optimistic analyst expectations. In addition, the stock has a B grade for Quality, consistent with its higher-than-industry profitability.
BABA is ranked #17 of 46 stocks in the China industry.
Beyond what I have stated above, we have also given BABA grades for Value, Growth, Stability, and Momentum. Get access to all BABA ratings here.
Bottom Line
Chinese e-commerce giant BABA delivered solid results in the fourth quarter and full-year 2023. Furthermore, the company is positioned to maintain its business momentum in the fiscal year 2024 and beyond as it recently announced the restructuring and split into six different business groups. This move is expected to “unlock the value” of the company’s various businesses and boost its market competitiveness.
Given BABA’s outstanding financial performance, promising growth prospects, and high profitability, we think investing in this tech stock could be wise now.
How Does Alibaba Group Holding Limited (BABA) Stack up Against Its Peers?
BABA has an overall POWR Rating of B. One could also check out these other Chinese stocks with an A (Strong Buy) rating: FinVolution Group (FINV), LexinFintech Holdings Ltd. (LX), and Tarena International, Inc. (TEDU).
What To Do Next?
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BABA shares fell $0.13 (-0.16%) in premarket trading Tuesday. Year-to-date, BABA has declined -8.08%, versus a 10.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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