Alibaba: Fear Of Missing Out? Do Not Miss The Boat Again


  • In the past month, BABA stock had recovered 28.04% of its value, from $85.83 to $109.90.
  • In comparison, S&P 500 Index only rose by 0.42% in the same time frame.
  • Given the potential rally post Big Tech recovery in China, consensus estimates a price target of $170.89, with a 55.5% upside.
  • Therefore, investors who had hesitated should load up on this undervalued stock now.

Investment Thesis

Since our last analysis, Alibaba Group Holding Limited has risen by 18.59%, from $92.67 on 17 May 2022 to $109.90 on 9 June 2022. It is evident that the recovery has been swift, given the multiple positive tailwinds in its direction. However, with the shaky Chinese stock market, it is uncertain if the gains could hold and trigger a bull run for BABA.

However, if we were to split up China‘s unrelenting COVID-19 strategies and the potential easing of big tech punishment, BABA’s recovery is almost certain, given its good execution in FQ4’22. That would be one highly welcomed news, given how dreary the stock market looks right now, given that BABA had recovered 28.04% of its value in the past month compared to S&P 500 Index at 0.42%. Opportune investors would be well advised to take advantage of the current bear market to add more undervalued stocks to their portfolios, since it is entirely possible that the time of maximum pain is over.

Nevertheless, investors hoping for the revival of ANT IPO would definitely be disappointed, since the Chinese government denied the news report, leading to a -8.13% stock decline from $119.62 on 8 June 2022. Those who continue to focus on China’s Zero Covid Policy would also be discouraged, given the unlikely scenarios for any relaxation there. In fact, Shanghai was forced to scrap its previous reopening plans due to rising infections on 10 June 2022. Stephen Innes, the managing partner at SPI Asset Management, said:

Still, the apparent negative feedback loop is there is less incentive for the authorities to move away from “zero COVID” soon. (Reuters)

BABA Closed Off FY2022 Beautifully Despite Macro Issues

BABA Revenue and Gross Income

S&P Capital IQ

In FQ4’22, BABA reported revenues of $32.18B, representing excellent YoY growth of 12.51%, despite the enforced lockdowns in multiple Chinese cities. Though the company’s declining gross margins may worry some investors, we could attribute it partly to the inflation caused by global supply chain issues and China’s Zero Covid Policy and reinvestments into its businesses, and therefore, temporary.

BABA Revenue By Segment

S&P Capital IQ

It is evident that BABA’s e-commerce segment continues to be the revenue driver, with 13.1% YoY growth while accounting for the majority of its revenue at 86.6%. Its cloud segment also reported remarkable growth with an increase of 16.7% increase YoY, despite the impact of COVID restrictions and reduced demand from the tech industry.

BABA Net Income and Net Income Margin

S&P Capital IQ

BABA’s net income, unfortunately, declined YoY, from -$0.82B in FQ4’21 to -$2.54B in FQ4’22, thereby deepening its net losses margin YoY from -2.9% to -7.9%.

BABA Cash/ Equivalents, FCF, and FCF Margins

S&P Capital IQ

It is also apparent that the generation of BABA’s previously robust free cash flows is declining, given the decreasing profitability and its payment towards the Anti-monopoly fine at approximately $1.36B. However, since the latter represents the final payment towards the Chinese government, we may expect improved FCF from FQ1’23 onwards.

BABA Operating Expense

S&P Capital IQ

Given BABA’s continuous efforts to improve its operating efficiencies by cutting jobs in March 2022 and enhancing its logistical costs, we may also see improved operating margins moving ahead. We can see hints of these improvements in FQ4’22, where the company spent $7.19B in its operating expenses in FQ4’22, representing a 25% decrease QoQ in R&D, Selling/Marketing, and General/Administrative expenses. Assuming that BABA continues on this cost reduction path, we are confident of BABA’s capabilities in improving its profitability moving forward.

BABA Projected Revenue and Net Income

S&P Capital IQ

Since our previous analysis in May 2022, BABA’s revenue growth has been upgraded from a CAGR of 7.09% to 9.33%, though its net income is projected to grow even faster from a CAGR of 38.94% to 56.53%. For FY2023, consensus estimates also upgraded its revenue growth to 3.62% YoY, thereby underlining their optimistic view on the recovery of BABA stock and the overall Chinese market. Assuming the stabilization of the Chinese economy as per the government’s intention with a GDP target of 5.5%, we could potentially see an upwards rerating of BABA’s projected revenue and net income growth moving forward. We shall see.

In the meantime, we encourage you to read our previous article on BABA, which would help you better understand its position and market opportunities.

  • Alibaba: A $180 Stock Assuming Recovery

So, Is BABA Stock A Buy, Sell, Or Hold?

BABA 5Y EV/Revenue and P/E Valuations

S&P Capital IQ

BABA is currently trading at an EV/NTM Revenue of 1.92x and NTM P/E of 14.73x, lower than its 5Y mean of 6.29x and 25.10x, respectively. The stock is also trading at $109.90, down 52.4% from its 52 weeks high of $230.89, though already at a 49.9% premium from its 52 weeks low of $73.28.

BABA 5Y Stock Price

Seeking Alpha

Nonetheless, given the consensus estimates price target of $170.89 for BABA, investors who add now would still have a 55.5% upside from current prices. It is also evident from the chart that its pre-pandemic prices stand at $170s before rallying to over $300 during the ANT IPO hype.

Therefore, it is not too late to back up the truck and load up on BABA now.

Therefore, we rate BABA stock as a Buy.

Author: Juxtaposed Ideas, Seeking Alpha

You might also like