Alibaba (NYSE:BABA) Group Holding Ltd. (NYSE:BABA) is one of the largest Chinese equities in the word, having a market capitalization of approximately $180 billion at $75 per share. Renowned as one of the fastest-growing companies in the world, it has become a dominant figure in Asia's e-commerce, finance and service industries.
Over the past several years, it had to navigate through China's evolving political landscape and economic objectives. However, China remains the world's largest e-commerce market and Alibaba is one of its major players.
As such, I am bullish on the stock because of its strategic market positioning, which I believe will give it upward trajectory. Although the company continues to enjoy high profit margins, its current valuation appears discounted due to the geopolitical risks. However, I believe these concerts are overblown since it has extensive operations and geographical diversification.
Further, Alibaba's business model is quite similar to Amazon's (NASDAQ:AMZN) as its operations are divided into several segments.
The Taobao and Tmall unit is the largest segment. Taobao is an online platform which primarily operates on a model of selling advertising wherein the sellers pay for increased visibility of their products. Tmall is a business-to-consumer platform primarily targeting big brands and makes its revenue through charging commissions per transaction.
The Cloud Intelligence Group provides a range of services, such as cloud computing, data storage, big-data processing and artificial intelligence through subscriptions.
The International and Digital Commerce segment is made up of AliExpress, Trendyol, Lazada and Alibaba. These are business-to-consumer marketplaces that generate revenue through commissions, advertising, logistics and support services. Alibaba, on the other hand, does have the same structure but serves only business to business.
The Cainiao division is responsible for logistics, which consists of storage, fulfillment and shipping services for the more than 200 countries.
Global trends and financial perspectiveEcommerceDb forecasts the e-commerce market is likely to hit $5.14 trillion by the end of 2024, having grown at a compound annual rate of about 15% since 2019. China remains the leader in this space, with over 50% market share for global e-commerce sales. Projections for 2025 indicate the market will grow to $3.30 trillion, with Alibaba being its main player.
If we look into the company's financial performance, Alibaba performed well in the first quarter of 2024, beating earnings estimates. The international e-commerce segment generated $3.80 billion revenue, contributing to 12% of its total revenue of $30.70 billion, which saw a 7% year-over-year increase. This segment proved to be the fastest growing with an increase of 45% year over year. Earnings per share came in at $1.40, beating estimates by 12.90%.
It is important to note that Alibaba has continued to expand internationally, especially through its cloud services and other generative artificial intelligence technologies, which have driven a 30% increase in contribution in e-commerce orders. In the fourth quarter, Chinese commerce contribution still dominated through Taobao and Tmall, which generated $12.90 billion.
This quarter marks a highly aggressive internationalization strategy in marketing through employing global icons like David Beckham as brand ambassadors and sponsoring international events like Euros 2024, clearly indicating its future direction is focusing on international growth.
Additionally, Alibaba is a leader in China's generative AI infrastructure services sector. It plans to integrate AI to its international commerce business, which include websites like AliExpress. This will help maintain its advantage over local competitors in the long run.
The main reason for my bullish stance on Alibaba is its financial indicators. The stock trades with a current cash ratio of 44%, a 17.86 price-earnings ratio, a forward price-earnings ratio of 9.42, price-sales ratio of 1.51 and price-book ratio of 1.37, which are all well below the sector median, indicating major undervaluation. The stock also offers a 1.32% annual dividend yield, which is a bit insignificant even for dividend-focused investors seeing the kind of capital appreciation on the offer. It is just a type of stock that serves every kind of investor.
Cash is king, and that's exactly what Alibaba has. The latest balance sheet shows liabilities of $62.10 billion due within a year and liabilities of $31.80 billion due after that. On the other hand, it had $85.30 billion in cash and $8.90 billion in receivables due within a year. These liquid assets approximately match the total liabilities, suggesting its balance sheet is solid. The fact Alibaba has more cash than debt is a strong indicator of its ability to manage its debt safely. Additionally, Ebit grew by 20% over the last year, further bolstering its capacity to handle debt and corroborating my bullish thesis.
The company has also been aggressive with its share repurchase program, spending around $5.80 billion to buy back 77 million American depositary shares during the quarter that ended in June 2024. For the fiscal year ending March 31, 2024, it repurchased a total of 1.25 billion ordinary shares, amounting to $12.50 billion. This buyback not only demonstrates that management is bullish on the company's future operating and financial performances, but it also signaling to the market that Alibaba's shares are undervalued.
When it comes to competitors, I believe it is more viable to compare it to its greatest rival, which is Amazon.
Although both companies' revenue growth rates have been nearly the same over the last five years, it is much more appreciable for Amazon as it has a larger revenue base. However, Alibaba's extremely attractive level of Ebitda and net margin needs to be highlighted. These indicators show the company did not give up profitability to grow, which is what a value investor looks at.
To carry out the company's valuation, I will use the comparative valuation method with price-earnings and PEG.
On the subject of valuation, the company presents a comprehensive discount when compared to its peers. The companies' average forward price- earnings ratio is 15 (sector median), which is well above Alibaba's (9.42). Even if we look at the forward PEG ratio, which also incorporates the future growth, we have an average of 1.07 for the two companies, which implies an upside potential of 50% for Alibaba stock in the next 12 months.
Potential risksNow let's talk about some risks when it comes to investing in Alibaba.
The biggest risk is the geopolitical issues that surround the relationship between the United States and China. Alibaba's operations have been affected by tariffs were put in place on Chinese imports, which had a huge impact on its business.
Apart from the macroeconomic challenges, competition in China is rising. New players such as Pinduoduo (PDD), with a group purchase business model, and Douyin have emerged as formidable opponents. Nonetheless, Alibaba has been preemptive in handling the threat by putting in measures that have included launching the Taobao Deals platform back in 2020 as a way of offering prices that are affordable and directly connecting consumers with manufactures to counter PDD. Moreover, PDD has been dealing with malware and cybersecurity issues for a long time, so it will take time to gain consumers' trust and be considered a main player.
Final wordsDespite the risks that comes with a U.S. election year, the company has taken various measures to diversify its business and geographies so that it is able to effectively compete.
Alibaba remains an e-commerce leader as far as its market is concerned. Although China has recently shown signs of maturity, the current discounted valuation and attractive margins supersedes that concern. With the company's generative AI innovations and aggressive international marketing approach providing a solid foundation for growth, and with the undervaluation of the stock coupled with the most attractive forward price-earnings and PEG ratios, Alibaba presents itself as a great opportunity for all kinds of investors.
This content was originally published on Gurufocus.com
