Alibaba: What Will It Take To Overcome Regulatory Fears?
Alibaba continues to confound investors. Frankly put, the company’s combination of size, scale, and operational growth are incredibly unique. There are very few companies in the world with market caps as large as BABA’s (currently, the company’s market capitalization if $580 billion) that are also growing at such a strong double digit clip (in recent quarters, BABA has consistently posted strong double digit top and bottom-line growth). And yet, the stock trades with a relatively cheap valuation attached to it (especially relative to the big-tech companies in the U.S. that traditionally trade with premiums well above the market multiple), showing that investors are not willing to dive head first into this high growth technology stock.
Why is that?
Well, Richard Saintvilus, a Nobias 5-star rated analyst, recently published an article in which he touched upon the company’s intriguing valuation, relative to the U.S. big-tech firms, saying, “BABA shares, which have fallen from their peak of $319 per to around $225, continue to trade at a discount to their American FAANG peers. This is even though Alibaba has demonstrated the high-growth, high-profitability characteristics that are consistent with the likes of Amazon (AMZN) and Google (GOOG, GOOGL), which enjoy premium valuations.”
Jonathan Weber, a Nobias rated 5-star analyst who publishes work at Seeking Alpha, recently penned a series of articles on Alibaba, expressing his bullish outlook in one of his articles which Weber titled, “Alibaba: Be Greedy When Others Are Fearful” he said, “Some tech stocks still look quite overvalued, we believe, but that is not true for Alibaba - we see this as a long-term winner that has been punished too much over the last couple of months.”
Regarding valuation, Weber says, “During the first three quarters of the current fiscal year, Alibaba generated operating cash flows of $32 billion, which equates to annualized cash flows of $43 billion. Relative to Alibaba's market capitalization of $630 billion that is a quite large amount that equates to a cash flow yield of 6.8%.” He continued, “Alibaba is thus trading at a cash flow multiple of just 14.7 right now, which seems quite low, considering the market position, growth outlook, and attractive business fundamentals.”
Weber notes that “analysts are currently forecasting that earnings per share will grow by 20% annually for the foreseeable future,” and therefore, he believes that BABA shares deserve a premium valuation. However, BABA continues to trade near 52-week lows and while the divergence between relative operational performance and valuation metrics here may point towards a buying opportunity, the company continues to face unique risks as well.
Saintvilus discussed the stock’s ~35% sell-off, explaining, “Alibaba’s recent struggles began in late December when the company’s planned $34.4 billion initial public offering of its payments unit Ant Group’s was suspended, seemingly in retaliation after billionaire founder Jack Ma spoke critically about Chinese regulators.” He did note that this issue was apparently resolved, with the company paying a $2.78 billion fine.
Weber recently touched upon the recent fine BABA paid chinese authorities in his article titled, “Alibaba: Shares Keep Dropping, Keep Buying” saying, “The fine alone isn't a major issue for Alibaba, as this equates to just a couple of weeks' worth of cash flows. Still, it is of course possible that there will be more investigations and more fines in the future, although I don't see this as overly likely.” But, government regulation remains an ever present threat for this Chinese giant and looking ahead to Q4 earnings, Saintvilus said, “The company on Thursday must give investors a reason to believe the stock is not only worth the near-term risk, but also has significantly more long-term upside than expected.”
Those earnings have since been posted and they were not strong enough to change the bearish sentiment largely surrounding the stock. While the company’s growth continues to be impressive, BABA didn’t quite live up to the market’s expectations.
Alibaba’s shares dipped after the results, trading down to the $210/share area, and Anders Bylund, a Nobias 5-star rated analysts posted an article on The Motley Fool rationalizing the short-team weakness, saying, “Sales jumped 78% higher year over year, landing at $28.6 billion. Earnings increased from $1.30 to $1.58 per diluted American depositary share (ADS). Analysts were expecting earnings of roughly $1.79 per ADS on revenue in the neighborhood of $28.1 billion. In that light, this was a mixed report.”
Bylund continued, saying, “Looking ahead, Alibaba expects full-year sales to rise by approximately 30% in 2022, as measured in local currencies. By comparison, Alibaba's revenue increased by 32% in 2021 when adjusted for currency translation and the $3.6 billion buyout of Chinese supermarket chain Sun Art.” In other words, the company didn’t present a story that pointed towards a re-acceleration of growth in a post-Ant Financial fiasco world, which gets back to Saintvilus’s point: what is the major growth catalyst that will propel shares higher?
The expansion of eCommerce remains one of the world’s strongest secular growth trends and BABA is a clear beneficiary of this trend. In his article, Saintvilus touched upon this, saying, “What’s more, the surge in online spending trends, including online grocery penetration, remains strong with gross merchandise value in China expected to grow at close to 20% annually through 2025. In the most-recent quarter, not only did the company’s Core commerce sales soar 38%, annual active consumers on China retail marketplaces reached 779 million, up 22 million year over year.”
It’s also worth noting that eCommerce isn’t Alibaba’s only growth engine. Weber says, “Alibaba's cloud computing revenues have grown by 54% so far this year, and since China's cloud computing market is not yet very developed, the unit has a large growth runway over the coming years. On top of that, the cloud business has been profitable for the first time during the most recent quarter; profit accretion of the unit should thus continue to improve meaningfully going forward.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
And, while the Chinese regulatory environment poses a unique threat to BABA shares, Weber also highlights the benefits of a strong market position in that country, noting, “China's GDP will likely grow by 8% this year, following a year of positive growth in 2020, despite the pandemic. China's GDP growth is, at least in part, driven by growing consumer spending, which naturally benefits Alibaba's core business.”
Alibaba also has investments in a variety of exciting technology start ups and is expanding its presence outside of the Chinese market in an attempt to diversify its revenue stream. And yet, with all of this being said, the stock continues to trend downward. So, are Nobias blue chip (4 and 5-star rated) analysts bullish or bearish on BABA stock? Well, since April 1st, we’ve seen 36 bullish opinions posted compared to 3 neutral opinions and 43 bearish opinions.
The results point towards this continuing to be a battle ground stock. Only time will tell whether or not BABA’s growth potential eventually overwhelms the bears or if investors continue to invest capital in growth names that operate in more favorable regulatory environments. Weber says, “Alibaba isn't risk-free, but the current valuation more than accounts for potential risks, I believe.”
However, Bylund offers a more cautious conclusion to his piece, saying, “It may make sense to pick up a few Alibaba shares at these low prices, given the company's impressive revenue growth. Just be sure that you can stomach the risk of the pending regulatory reviews leading to potentially painful concessions.”
Disclosure: Nicholas Ward is long JAMZN and GOOGL. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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