Alibaba: A Top Turnaround Stock For 2022

Summary

  • Shares of Alibaba skidded almost 50% in 2021.
  • However, 2022 could be a much better year for Alibaba if the company executes well on its e-Commerce and logistics businesses.
  • Alibaba’s e-commerce ecosystem will continue to expand and may see the addition of up to 250M new customer accounts next year.

After a devastating year for Alibaba investors, 2022 could be a great year for the retail business if it continues to expand its e-Commerce ecosystem rapidly and stays out of trouble. The delisting risk for Alibaba’s ADR shares is overrated and the stock is ripe for a fundamental recovery!

2021 was a terrible year for Alibaba…

The bad news piled on for Alibaba throughout 2021. The CCP cracked down on Alibaba and slapped the e-Commerce company with a multi-billion dollar fine. China’s property sector is in decline which has led to decreasing property prices and an unprecedented liquidity crisis for real estate developers, affecting consumer confidence and retail spending. Major Chinese property developers, including the country’s largest real estate firm, Evergrande, have defaulted on scheduled interest payments or are on the brink of doing so. There is also a growing fear that the CCP will force Alibaba to withdraw its ADR shares from the NYSE. All together, these factors resulted in a near-50% drop in pricing for shares of Alibaba in 2021.

Data by YCharts

Focusing on Alibaba’s biggest asset: Integrated e-commerce operations

So far, the market is not ready to value Alibaba’s e-Commerce business the way it should be valued: based on its prospects for expected growth. But putting all the 2021 noise about crackdowns and fines aside, Alibaba’s e-Commerce business is blossoming. Especially promising is that Alibaba has been building out its logistics business during the pandemic which integrates seamlessly with its domestic and international e-Commerce operations. Alibaba’s e-Commerce performance has been very strong throughout 2021, although Alibaba sees revenue growth slowing to 20-23% in FY 2022. However, the long term outlook for China’s e-Commerce sales is very positive: retail e-Commerce sales are expected to grow from $2.6T in 2021 to $3.8T in 2025 which calculates to an annual growth rate of 10%. Since Alibaba generated about 77% of its Q2’22 revenues from its home market, an investment in Alibaba is chiefly a bet on China’s continual retail e-Commerce growth.


(Source: eMarketer)

Alibaba heavily invested into its e-Commerce capabilities during the pandemic. Cainiao, which is Alibaba’s logistics platform that distributes parcels from China to the rest of the world, saw a 40% increase in cross-border revenues in the first six month of FY 2022. Other strategic investments in e-Commerce businesses like Lazada in Southeast-Asia and trendyol in Turkey, have resulted in massive increases in the number of customer accounts, gross merchandise value and order volumes.

Massive upside in customer account growth

Alibaba added 62M new customer accounts to its platform in the second-quarter, quarter over quarter, 20M in its international marketplaces, and 42M in China. I estimate that Alibaba will add 230-250M new customer accounts to its ecosystem in 2022 with 30-40% of this growth occurring in Alibaba’s marketplaces outside of China. By year-end 2022, Alibaba could have 1.5B customer accounts in its ecosystem.

Because of these strategic investments in the firm’s e-Commerce capabilities, Alibaba’s total e-Commerce revenue growth accelerated 2 PP in Q2’22 to 31% year over year.

(Source: Alibaba)

Alibaba: 10 X P-E Based On FY 2024 EPS

Alibaba’s e-Commerce business is profitable and the company is set for sustained growth in 2022 as new merchants and customers will keep signing on to the platform. In the first two quarters of Alibaba’s FY 2022, the firm generated profits of 50.5B Chinese Yuan which is the equivalent to $7.8B. Despite all the fines and setbacks Alibaba had to put up with this year, Alibaba still makes a lot of money from its businesses, especially its e-Commerce operations. Alibaba’s net margin so far in FY 2022 is 12.4%.


(Source: Alibaba)

Alibaba’s strategic e-commerce investments are starting to pay off and the firm’s EPS growth is undervalued. Alibaba is projected to see EPS of $8.56 in FY 2022 and $9.79 in FY 2023, implying 14% year over year growth, which gives shares of Alibaba a 12 X P-E ratio (FY 2023). Based off of FY 2024 EPS, the P-E ratio declines to 10 X.

Data by YCharts

Risks with Alibaba

The biggest risk for the e-commerce company, as I see it, is that the CCP could levy fines on tech monopolies for their failure to report corporate transactions to the authorities. The CCP could also force Alibaba to sell off Ant Group or other assets. For that reason, I see the CCP as the biggest wild card for Alibaba and other tech companies heading into 2022.

What I don’t see as a big risk for Alibaba is that the ADR shares will get delisted from the NYSE. If the Chinese Communist Party wanted Alibaba’s ADR shares to be delisted, it would have already happened. The delisting risk is probably the most overrated risk with Alibaba.

Final thoughts

This year was a terrible year for Alibaba in more than just one way. But 2022 could be a markedly better year for the e-Commerce company as the world moves on from the pandemic and business returns to normal. The commercial outlook for Alibaba, despite a lowered revenue forecast, is positive. Investments made in the logistics and retail e-Commerce businesses could finally pay off in 2022 and lead to stronger than expected earnings growth. Although shares have massively underperformed in 2021, I believe the time has come for the market to start appreciating Alibaba’s intrinsic e-Commerce value again!

Author: The Asian Investor, Seeking Alpha

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