Alibaba: The Valuation Is Just Wrong

Summary

• Alibaba beat revenue and EPS predictions for the last quarter, causing shares to soar.
• Due to COVID-related uncertainties, Alibaba skipped its earnings guidance which the company usually provides at the beginning of the year.
• Strong account acquisition and share repurchases reflect deep value for investors, as does an unreasonably low P-E ratio.

maybefalse/iStock Unreleased via Getty Images

Alibaba's (NYSE:BABA) shares rallied 15% after the Chinese e-Commerce company submitted earnings results for the last quarter of FY 2022 on Thursday. Alibaba easily sailed past revenue and earnings predictions and I believe sentiment regarding Chinese companies has deteriorated too much at this point. Although Alibaba skipped its guidance for FY 2023, the firm's valuation still makes very little sense. Investors are underpricing Alibaba’s earnings potential!

Previous expectations

In my previous work on Alibaba, I mentioned the very real possibility of Alibaba outperforming EPS predictions on Thursday which have gone through a significant downward revision cycle over the last year. Low expectations were the main reason why I thought Alibaba could outperform low consensus EPS predictions. And this is what Alibaba did: The company reported Q4’22 adjusted EPS of $1.18 which beat predictions by $0.10. Additionally, Alibaba beat on revenues as well.

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Alibaba’s e-Commerce growth

Overall, Alibaba’s revenues increased 9% in the last quarter to 204.1B Chinese Yuan which calculates to $32.2B. Alibaba’s core China e-Commerce revenues increased 8% year over year to 140.3B Chinese Yuan ($22.1B), which was an improvement over the previous quarter which saw 7% top line growth. So, Alibaba slightly improved its performance in its most important business quarter over quarter. Alibaba also saw continual strength in Local Consumer Services where revenues surged 29% year over year to $10.4B Chinese Yuan ($1.6B) and the Cloud segment which saw its revenues increase by 12% year over year to 19.0B Chinese Yuan ($3.0B).

Alibaba

What stood out positively from Alibaba’s earnings sheet was that the company continued to make progress expanding its e-Commerce platform despite a challenged macro environment. Alibaba added 28M new accounts to its ecosystem in the last quarter, the majority of which (25M) were added in China. Alibaba’s domestic e-Commerce business is still the firm’s largest revenue source, contributing 69% of total revenues. However, Alibaba has a huge opportunity to grow its other businesses as well, especially its logistics operations which are vertically integrated into Alibaba’s e-Commerce operations, and its Cloud segment. I recently described the progress Alibaba is making in the Cloud business.

Alibaba

Alibaba ended the quarter with 1.3B active customer accounts in its enterprise. Over the last year, Alibaba added a massive 177M new customers to its platform which creates a base for long-term earnings and free cash flow growth.

Alibaba’s share buybacks

Before Alibaba released earnings, I mentioned that the company likely used its free cash flow in the last quarter to repurchase a ton of shares. It was obvious to me that the e-Commerce company would repurchase a lot of shares considering that Alibaba just up-sized its stock buyback from $15B to $25B at the time and that the stock traded at unreasonably low prices in March.

I like it when companies increase their buybacks when stock valuations are depressed and Alibaba did in fact repurchase a significant amount of shares in the last quarter. In Q4’22, Alibaba repurchased approximately 17.8M American Depositary Shares for about $2.0B. I expected a minimum share repurchase of $2.0B. In the last twelve months, Alibaba repurchased 60M American Depositary Shares for a total consideration of $9.6B.

Alibaba

Skipped earnings guidance

Alibaba did not provide earnings guidance which it normally does at the beginning of the fiscal year. The e-Commerce firm cited uncertainties related to COVID-19 as a reason not to provide guidance. Normally, a lack of guidance is not well received and stocks of companies that don’t guide are punished by the market. In this case, however, things are different. Alibaba’s shares have been so battered so much since the fourth quarter of 2020 that investors cheer results even if they are more mediocre.

Alibaba’s valuation is wrong: Undervalued e-Commerce prospects

Alibaba’s stock market valuation makes very little sense to me. This is because, for one, Alibaba is very profitable. Alibaba generated net income of 47.1B Chinese Yuan ($7.4B) in FY 2022 while adjusted net income was 136.4B or $21.5B. There is some serious profitability in Alibaba’s business and investors don’t seem to appreciate this right now. Additionally, we are dealing with one of the largest e-Commerce empires in the world regarding account size and reach, but Alibaba's valuation still does not reflect those factors. Shares of Alibaba trade at a P-E ratio of 10 X. JD.com (JD), for example, has a P-E ratio nearly twice as high as Alibaba's. Alibaba's historical valuation shows a P-E ratio as high as 30 X. As wrong as Alibaba's valuation is, it represents deep value and low risk.

Data by YCharts

Risks with Alibaba

Alibaba faces continual top line risks related to a slowdown in the Chinese e-Commerce market. While Alibaba is investing in other businesses to diversify its revenue mix, a continual moderation in top line growth poses a risk for Alibaba and the stock. What would change my mind about Alibaba is if earnings and free cash flow prospects in the e-Commerce business seriously deteriorated or Beijing announced new crackdowns on the company.

Final thoughts

I expected Alibaba to do better than estimates in Q4’22, in large part because investor expectations have been driven too low. Given the circumstances with COVID-19 lockdowns and a regulatory onslaught in the last year, Alibaba did a good job in squeezing out 9% revenue growth.

Alibaba does have some problems, like slowing top line growth and reliance on domestic e-Commerce transactions, but the firm’s irrationally low valuation is not of them. Alibaba added a significant number (177M) of new accounts in the last twelve months which speaks to the strength and the appeal of Alibaba’s various e-Commerce platforms. Alibaba’s growth is still widely undervalued and I believe the valuation is just plain wrong!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BABA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[SA-NJ52]

@The Asian Investor

Decades is the correct term.

The Chinese have never experienced freedom nor democracy...ever.

The 100 Flowers Period of the the late 1950s was the closest democratic experience.

That was almost 7 DECADES ago.

@gandc

[SA-NJ52]

@The Asian Investor

The bad news needs to be resolved before earnings drives any Chinese stock.

Besides the two points I made to @Sino1962 there is the issue of the pretend ADRs aka the VIEs.

As a result, earnings will not matter with Chinese stocks for many decades to come.

But that won't stop me from trying to unload my KWEB and my FXI when the time is right.

@gandc

[The Asian Investor]

@gandc Many decades to come? I believe you forget how quickly opinions can change in the stock market :))

[The Asian Investor]

@gandc Thank you for sharing your point of view!

[EliasMouawad]

Nice article. The technical chart is getting better day after day. The stock should jump above $100 soon.

[The Asian Investor]

@EliasMouawad Thank you! :))

[SA-NJ52]

@Sino1962

You are not correct. There are only two ifs...

Xi has said that he wants Taiwan back. But the Chinese underestimated the world reaction to Russia's invasion of the Ukraine so his invasion plans are on hold for now.

The second if is whether or not China will act as a responsible world power. While this would do wonders for my FXI and my KWEB, that if will never happen so long as Xi is in power.

@gandc

[Fin me]

I suppose the key issues here is a threat of delisting. We already have a good precedent with Gazprop (and other Russian stocks). There are less risky plays on the market.

[fjvera]

@Arkstone i still own some Gazprom holdings, in moex. Also holding baba in HK. I don't care delisting.

[Fin me]

@fjvera Happy for You! I have sold all Gazprom right before the war :)

[fjvera]

@Arkstone what i meant is you can still be an owner if you want with no issues at all. USA ADRs is not the only way to own foreigner business, I'll never understand why all these supposed "risks" of delisting.

[SA-NJ52]

@The Asian Investor

You make the BABA's valuation problem out to be complicated and it is very simple.

You need to go and read my posts on what moves markets.

Chinese stocks are not driven by inflation, earnings and interest rates.

They are driven solely on news.

When Xi invades Taiwan, Chinese stocks will crater just the Russian stocks did.

If Xi follows Deng Xiaoping.... To get rich is glorious’...: how set China on a path to rule the world...BABA will do well if the bamboo curtain ever gets lifted.

theconversation.com/...

Now we could hope for a remake of the 100 Flowers period but that would be a step too far Cowboy Communist Party.

@gandc

[Sino1962]

@gandc wow! That’s a lot of ifs. What if US gets bombed by nuclear ? Would US stocks be uninvestable too?

[The Asian Investor]

@gandc I would add that they are moved in the short term by news, in the long term by earnings and free cash flow

[macro long&short]

I know, its valuation is way too high

[Dddvalue]

Hopefully this signals a pivot of CCP from the Chinese Communist Party to become the Chinese Civilization Party. Communism is a failed ideology while Chinese Civilization is the longest continuing civilization in the history of human kind. It’s so deep, rich and accepting that even conquering foreign invaders ultimately became “sinicized”.
The Chinese also has a long pro-business and pro trade history. And, this aligns with empirical evidence that private businesses are the best contributors to quality economic growth.

www.google.com/...

[Tenaval]

@Dddvalue But. XJP is a communist. At least 5 more years of XJP. Mind you the CCP leaders live longer than most of us. And whoever takes over XJP may be more communist than XJP.

[Dddvalue]

@Tenaval what’s still unclear to me is how much power is concentrated in XJP. Ray Dalio believes CCP rules by committee. Politburo composition would be key.

If CCP pivots to the “Chinese Civilization Party”, I think CCP will be able to make new friends. There are many autocracies that the US and the West are working with. Turkey, Saudi Arabia. Even Modi in India is a Hindu nationalist who has led India to become more autocratic. Singapore, the model that Deng wanted China to follow, has been autocratic also.

So, an autocratic “Chinese Civilization Party” should be as acceptable to the west as Singapore’s DAP.

You see how life can be easier for the Chinese just with a little rebranding and ideological flexibility by CCP.

The alternative will lead to Chinese isolation, Chinese common poverty and then likely the world facing nuclear end.

[Ishi Kenjo]

@Tenaval Most Democrats are more communist than XJP!!!

[Dddvalue]

Very well written article on a need for China to return to its ideological flexibility of the recent past.

www.economist.com/...

[Chestrkwll]

Asian Investor never met a stock he didn't like

[UNCLEJUNIORSOPRANO]

the ccp took away all hope from honest stock holders. NEVER AGAIN WILL I EVER BUY ANOTHER CHINESE STOCK. Phooey!!!

[atpalpha]

It’s cheap for a reason. That reason is Xi and CCP. Problem will only worsen as CCP ratchets up pressure on Taiwan. Fall out will be severe and not good for Chinese equities. This is a VERY HIGH RISK play.

[arok79]

@atpalpha people will never learn man. China is uninvestable, and yet people still like losing money

[arete_builders]

@atpalpha Every day that the Ukrainians kill off Russian tanks & ships & every day that the West ratchets up economic sanctions on Russia makes Chinese saber rattling over Taiwan less relevant.

Theres certainly a risk here. But I think its a lot lower than it was 3 months ago.

[atpalpha]

@arok79 agree completely. Learned my lesson the hard way. There’s an old saying. Fool me once, shame on you. Fool me twice, shame on me.

[Vaca Valley]

Back up the Truck Buy

[Robert NYC]

By definition the market is never wrong.

Talking your book or covering up all the past ‘Buy’ calls you made before it went lower?

[Davadaba]

I have no idea what’s really going on in China. Truthfully I’ve come to realize you can’t trust any communication coming from China. I will not invest there except that which exists in my international mutual funds or etfs. No wishful thinking or hope it changes. Good luck doing your thing

[cvappone]

Alibaba president Evans at Davos: ""We’re developing, through technology, an ability for consumers to measure their own carbon footprint. What does that mean? That’s where are they travelling, how are they travelling, what are they eating, what are they consuming on our platform. So: An individual carbon footprint tracker.”

Punishments and rewards to follow

[Not Finding Alpha]

@The Asian Investor I hope you're right but I don't see Mr. Market's disdain for BABA changing anytime soon. The SP bump after the latest ER probably won't last. Nobody wants to buy BABA when Xi could nationalize it at any time, the regulatory onslaught could resume, and / or it could be delisted, etc etc, no matter how good the fundamentals might look.

[Artic Fox]

@Not Finding Alpha why bother nationalizing it and having to manage it when you know you can keep it in line with your objective to perpetuate the rule of the CCP? The trend in China is reducing the number of zombie SOEs which are burdensome on the financial system

[CoChuck]

@Not Finding Alpha so why not have some sort of hedge for such a possibility, like some far OTM puts? BABA is either going to grow or drop to nearly nothing in the next couple of years. The one thing it probably won’t do between now and 2024 is sink to and hold at $50 a share.

[The Asian Investor]

@Not Finding Alpha It may take a while for the market to turn around, but based on earnings and FCF, Alibaba is deeply undervalued!

[gmseegull]

Yea, let’s run out and invest in China.

[Pierre Rossouw]

@gmseegull Now you're switching on! Good move.

[didit2]

I have looked at BABA many times but the biggest risk not mentioned is being a Chinese co. will it be delisted??? I have enough risk with having invested in MBT.
Not looking to get screwed again and will not invest in anything Chinese.

[Ale Pede]

@didit2 delisting risk is very low.

[The Asian Investor]

@didit2 I consider the delisting risk to be very low, I have never seen this is a big risk for Alibaba. Even if they delisted, they would simply relist somewhere else and shares could be swapped.

[heckinvest]

The market is always right, the article got it wrong. A share price slump of -67% since 2020 implies i) slowing growth ii) lower margins iii) increased and unpredictable regulatory intervention.

[The Asian Investor]

@heckinvest I am not saying these are not risk factors, I am saying that the market has become too bearish on Alibaba's e-Commerce prospects.