Alibaba Is Betting Big And It Strengthens The Bull Case

Summary

  • Alibaba’s rather volatile e-commerce platform can be problematic for long term investors, as it tracks China’s economic growth rather closely.
  • But with the company investing in new and existing customer retention and expansion in their cloud offerings, there’s hope for long term growth which doesn’t rely on that volatility.
  • As a result, I am even more bullish on Alibaba’s long term growth and retain my opinion that the company is undervalued by about 50%.

I wrote about Alibaba‘s overall business developments last month and talked up the prospect of their long term growth returning, potentially providing superior investment returns than the broader market and other China-exposed ETFs or stocks.

Since then, just a few days ago, the company announced that it was investing $1 billion over the next 3 years to financially and operationally incentivize companies all across their cloud platform. This means that the hotly contested market of cloud based computing and businesses has a bigger place in Alibaba’s future as we await the e-commerce platform to recover alongside the People’s Republic of China‘s overall economy.

This investment, I believe, is setting the stage, along with their international expansion, for the company to significantly expand their customer base and grow the usage of the existing companies they have and will propel them to growth in the longer run, further justifying a higher share price.

A $1 Billion Investment

On September 23rd, the company announced that it was going to invest $1 billion over the course of the next 3 years for customers in the form of financial incentives like rebates, outright funding options and help with their go-to-market efforts. This is big news for the worlds third largest cloud computing company, behind Microsoft and Amazon.

The reason why most of the world cloud computing is concentrated in these big companies is that they can be far more competitive on pricing than smaller and newer companies can. With further incentives like the ones the company is now offering, it’s possible that we’ll see the company’s international expansion efforts exceed current expectations.

Similar to almost every single company you may work with or purchase a service from, from your bank to your credit card, from your cellphone plan to your car payment – companies the world over are offering things like rebates, cash incentives and others to get you in the door, hoping you’ll stay. This incentive package from Alibaba has the potential to bring in billion more over the course of the next 3-5 years than previously expected.

This is how I believe they’ll get there.

International Expansion On Steroids

The company mostly uses partnerships with companies all across the world in order to offer their public cloud computing services. They have more than 11,000 local partners around the world, including big companies like Salesforce (CRM) and VMware (VMW). These help Alibaba’s cloud platform reach users all around the world and is a big reason why they’re moving to further push their expansion.

The company, for the first time, has and is opening new data centers outside of China, as some security concerns with the People’s Republic of China remain on customers minds. This is also aimed at tapping into fast growing cloud computing markets like Thailand and Singapore, which are seen as hubs for the rest of the Asia-Pacific region when it comes to company business.

The Asia-Pacific region is the fastest growing region when it comes to cloud computing due to the rising per-capita income and surge in companies doing business in the region as nations like China and India continue their rapid economic expansion. The global cloud computing market is expected to grow at a near 24% CAGR and rise to nearly $1.5 trillion by the year 2028.

Expectations Likely To Be Exceeded

While the company’s e-commerce business is relatively volatile with China’s economic activity fluttering due to COVID-19 closures and general economic slowdown across the world – their business remains strong and analysts still expect the company to report billions in profits over the next few years.

This will further support the company’s cloud expansion and take care of their recent $2.5 billion fine by Chinese regulatory agency. As a result, I due believe that current expectations aren’t taking adequate account of the company’s incentives driving cloud computing growth.

Currently, analyst projections call for the company’s revenues to rise by over 70% over the next 5 years, increasing from the projected $127 billion in the current year to $218 billion for 2027. This, I believe, is underestimating the company’s potential growth in the cloud computing space, given that the market globally is projected to reach over $1.5 trillion. Here’s why.

In 2021 (fiscal 2022), the company reported just under $135 billion in total sales while their Alibaba Cloud sales were just $11.8 billion, less than 9%.

As e-commerce growth slows to around 10% annually, with this upcoming year growing at about 1% due to COVID-related limitations, cloud revenue will continue to grow at about 45% annually, I believe, through 2026 and then 30% for the remaining years. This means that the revenue breakdown is higher than current expectations:

2022 2023 2024 2025 2026 2027
E-Com $124B $136B $150B $165B $182B $200B
Cloud $17B $25B $36B $52B $76B $99B
Total $141B $161B $186B $217B $258B $299B

(Source: Author Calculations)

This is compared to the company’s current sales projections:

2022 2023 2024 2025 2026 2027
Sales $127B $144B $160B $188B $201B $218B

(Source: Seeking Alpha Earnings Estimates Aggregator)

With this predicted outperformance, the company’s current share price is quite undervalued with them trading at very low multiples. This further strengthens the bullish cash for the company’s long term prospects which I and other contributors here on Seeking Alpha hold.

Conclusion – Likely To Outperform

The premise of the bullish thesis is that even with current expectations – the company is undervalued by trading at multiples below 10x while expected to keep growing at 10% to 15% over the next decade or so.

But with this outperformance prediction, I believe that the company is highly likely to grow at more than the projected rate, providing further fuel for the company’s long term growth beyond their e-commerce platform.

The added benefit for long term investors is that the e-commerce business segment is highly reliant on broad economic conditions and is fairly limited to the growth in the People’s Republic of China and the region, many of whom think is rather saturated. But with cloud computing, the potential for growth is high and I believe it will make up for the volatility and make Alibaba an even more secure long term investment.

I remain highly bullish on Alibaba’s long term prospects and retain my conclusion that they are undervalued at current levels by as much as 50%.

Author: Pinxter Analytics, Seeking Alpha

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