Editor’s Note
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It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here. |
How One Government Decision Made Alibaba (BABA) Investors Rich Overnight
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No one wanted Chinese stocks…until now. China’s stock market soared after the country’s central bank cut interest rates by 50 basis points while injecting liquidity into the banking system. This comes a week after the Politburo announced measures to stem the decline in the country’s property values. According to our TrackStar data, financial pros scrambled to keep up with the exploding search volume for Chinese stocks in the past week. Alibaba (BABA) came out on top. We’ve written about how burdensome regulations and restrictions hold back this great company. But does this latest stimulus change our opinion? |
Continued…
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Alibaba’s Business Founded in 1999 by Jack Ma, Alibaba evolved from a simple online marketplace to a multifaceted tech giant. The company’s ecosystem encompasses e-commerce platforms, cloud computing services, digital media, and entertainment. Flagship platforms Taobao and Tmall serve over 1 billion active consumers annually, offering everything from daily necessities to luxury goods. Alibaba Cloud, meanwhile, has emerged as a leading provider of cloud infrastructure and AI technologies in Asia. Alibaba segments its business into the following areas:
Alibaba’s relationship with the Chinese government has been tumultuous in recent years. The company faced a significant setback in 2020 when regulators halted its affiliate’s $34 billion IPO, Ant Group, following founder Jack Ma’s criticism of financial regulators. This led to increased scrutiny, resulting in a record $2.8 billion antitrust fine in 2021. Despite these challenges, Alibaba has aligned more closely with government priorities, investing in rural e-commerce and advanced technologies. In its latest quarter ending June 30, 2024, Alibaba reported a 4% year-over-year increase in revenue to RMB243.2 billion ($33.5 billion). The company’s core e-commerce business showed signs of stabilization, with Taobao and Tmall Group achieving high single-digit online GMV growth. Notably, Alibaba’s cloud business returned to positive growth, driven by increasing adoption of AI-related products. The company continues to invest heavily in AI infrastructure, reflecting the growing demand for AI services among its cloud customers. Management expressed confidence that revenue from external cloud customers will return to double-digit growth in the second half of the fiscal year and gradually accelerate thereafter. Financials
Source: Stock Analysis Alibaba’s exceptional growth ran into severe headwinds in the post-pandemic era as China kept the country on lockdown, hampering business. Subsequently, revenue slowed from double-digits to single-digit growth. Fortunately, the company held its margins, generating ~$20 billion in free cash flow. Recently, the company has taken steps to return some of this money back to shareholders through a $2.5 billion dividend and stock buybacks of $18 billion, yielding 8.4% annually. Valuation
Source: Seeking Alpha Despite the recent surge in share price, Alibaba, and really all Chinese online retail stocks are reasonably cheap. Alibaba is the most expensive, trading at 16.5x forward earnings and 10.4x cash, while Vipshop (VIPS) is half that price, trading at 7.6x forward earnings and 4.0x operating cash flow. The rest of the companies land somewhere in between. Growth
Source: Seeking Alpha Pinduoduo (PDD), owner of Temu, has seen the highest growth rates of any stock on this list. However, the rest have all seen sales slow to single-digit gains as the Chinese economy slowed. Interestingly, Alibaba is the only company on this list to have seen its cash flow decrease on average over the last three years. Profitability
Source: Seeking Alpha We were surprised to see that Alibaba’s margins are low relative to those of its competitors. JD.Com (JD) is the only one with weaker numbers across nearly every measure. Yet, Pinduoduo and Baidu (BIDU) do substantially better in every category, especially net income margin.
Our Opinion 7/10 The latest stimulus package does put Alibaba back on a growth trajectory for a couple of years, or at least signals that’s where the government wants it. We’re also pleased to see the company begin returning the $61.8 billion in cash that’s built up on its balance sheet to shareholders. Nonetheless, this company still faces a heavy regulatory hand that creates uncertainty no investor should take lightly. |
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Proprietary Data Insights Financial Pros’ Top Chinese Internet Retail Searches in the Last Month
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