Alibaba’s Stock Continues To Be Under Pressure Due To Regulatory Issues

[Updated 09/22/2021] Alibaba Stock Update

Alibaba’s stock (NYSE: BABA) has fallen by 33% since the end of FY 2021 (ended March 2021). In comparison the S&P 500 grew by 10% in the same period. As per Trefis’ Alibaba’s valuation is $229 indicating a potential upside. For Q1 2022 (ended June 2021), the company posted revenues of $31.9 billion, up by 46% y-o-y, led by China Commerce retail segment and the International Commerce segment. Meanwhile Earnings for Q1 FY 2022 were nearly flat compared to the same period in the previous year due to higher operating expenses. In the current year, Alibaba’s  stock has primarily fallen as China continues its regulatory clampdown over the year. In the previous week, the stock fell on reports that Chinese regulators have ordered Ant Group to carve out its lending businesses into a separate entity while in the last couple days all Chinese stocks fell in response to reports that Chinese real estate giant Evergrande Group could be forced into bankruptcy. 

Overall however, we believe Alibaba at the current price has an upside potential due to expected revenue growth. In FY 2022, we expect Alibaba revenues to rise to RMB 817.4 billion ($124.8 billion). Further, its net income is likely to rise to be around RMB 127 billion ($19.3 billion), taking its EPS figure to RMB 46.98 ($7.05). In FY 2023 revenues are expected to rise to RMB 934.4 billion ($142.6 billion). Further, its net income is likely to rise to be around RMB 152 billion ($23.2 billion), taking its EPS figure to RMB 56.37 ($8.46) which coupled with the P/E multiple of 26.6x and an exchange rate of 0.15 $ per RMB will lead to Alibaba’s valuation of around $229, which is 40% above its current market price.

[Updated 03/17/2021] Does Alibaba’s Stock Have Upside?

Having grown 27% since the end of 2019, Alibaba’s stock (NYSE: BABA) still has a 40% upside potential. BABA’s stock grew by 27% from $182 at the end of 2019 to near $232 now, compared to the S&P 500 which gained 22% since the end of 2019. The company has seen revenue and earnings rising over recent years, while its P/E multiple has fallen. 

Despite the Covid-19 crisis, BABA saw its revenue rise by 42% in the first 3 quarters of 2020 as consumers preferred online purchases than brick and mortar visits. In Q3 2021 (ended Dec 2020), Alibaba posted revenue of $33.8 billion, up 45% y-o-y, and earnings recorded at $4.42 per ADS compared to $2.81 in the same period of the previous year. Further, the company reported $15.8 billion of cash inflows from operating activities for the first nine months.

In FY 2022 we expect Alibaba revenues to rise to $126.8 billion (RMB 838.6 billion). Further, its net income is likely to rise to $24.1 billion (RMB 159 billion), increasing its EPS figure to $9.03, which coupled with the P/E multiple of around 35.7x and an exchange rate of 0.15 $ per RMB will lead to Alibaba’s valuation around $323, which is 40% above its current market price.

[Updated 09/02/2020] Alibaba Stock: What’s Happening With China’s Amazon Rival?

After an almost 70% rise since the March lows of this year, at the current price of around $295 per share, we believe Alibaba’s stock (NYSE: BABA) has more to go. The Chinese leading e-commerce giant was growing fast going into the coronavirus crisis, and the lockdown has only made it stronger as more people adopt and increase amounts of online shopping and realize the importance of cloud computing. The internet retailer has seen its stock outperform through the coronavirus crisis, with a 40% increase year-to-date (compared to a 9% growth in the S&P). Alibaba’s stock is also about 62% higher than it was at the end of fiscal 2018 (year ending March), a little over 2 years ago.

Most of the 6% growth in Alibaba’s stock price between the FY 2018-2020 (FY ends in March) period was driven by the retailer’s impressive revenue growth of 80%. In addition, the company’s adjusted earnings per share (EPS) also grew by 43% during this period. Much of this growth was not valued in the stock, likely due to China’s economic instability and trade war uncertainty. To add to this, Alibaba’s adjusted net income margin contracted from 33.2% in FY 2018 to 26.0% in FY 2020, as it continued to expand its ecosystem, which includes the unprofitable cloud, digital media, and innovation units. Increased costs and more sales of lower-margin goods dropped the margins, which in turn, led to a decline in the P/E multiple from 35x to 26x during this period. Although the multiple currently stands at 40x levels, we expect it to grow further going forward on the back of Alibaba’s competitive advantages and the growth opportunities in China.

So What’s The Upside Trigger?

In the recent fiscal Q1, Alibaba’s revenue rose 34% year-over-year (y-o-y), driven by robust growth in its China commerce retail and cloud computing businesses. Its non-GAAP earnings rose 18% y-o-y. Alibaba’s core Chinese marketplace held annual active consumers of 742 million and mobile monthly active users of 874 million in June 2020, both more than 2x of the total U.S. population.

Alibaba will continue to generate most of its revenue from its core commerce and cloud computing businesses in the near to medium term. The company’s core e-commerce operations, which constitute around 86% of total revenues, have largely higher margins, notably lighter supporting infrastructure, and are less capital intensive. However, its smaller businesses which include digital media and innovation initiatives could be a bright spot in the long term as they still have a lot of room to grow. Alibaba also seems to be in a better position to tap the spending power of China’s burgeoning middle class, given that it is China’s biggest e-commerce business by gross merchandise value.

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