Chinese e-commerce behemoth Alibaba stock (NYSE: BABA) has fared relatively well over the last month, rallying by 22%, compared to the broader S&P 500 which was up about 4% over the same period. However, the stock still remains down by about 13% year-to-date, and by almost 65% from all-time highs seen in October 2020, making it one of the worst-performing mega-cap stocks through the Covid pandemic. So what’s driving the recent gains and will the momentum hold up for Alibaba?
There are a couple of factors driving the recent gains. Firstly, Alibaba posted a stronger than expected set of Q4 FY’22 (fiscal year ends March) earnings, with revenue growing 9% year-over-year to $32.2 billion and adjusted EPS coming in at $1.25 per share, indicating that the company was able to navigate the Covid-19 related issues that China witnessed over the quarter reasonably well. Moreover, the Chinese government has also been signaling that it could relax its crackdown on the tech sector. Chinese Vice Premier Liu He indicated that the country would “properly manage” the relationship between the Chinese government and the industry while supporting the listing of technology companies on domestic and foreign exchanges. This could be easing fears of further regulatory pressure on companies such as Alibaba, while giving investors some confidence about the future of stocks listed on U.S. exchanges, after concerns that they could be forced to be delisted amid frictions between the U.S. SEC and China relating to the auditing compliance of Chinese companies listed on U.S. exchanges. There are hopes that economic growth in China could also pick up as the government looks to ease the strict lockdowns and harsh zero-Covid policies that it imposed in multiple cities and provinces following a surge in Covid-19 cases in recent months. This could also be seen as a positive sign for the economy and big tech players such as Alibaba.
To be sure, there are still multiple risks for the company. The regulatory overhang on the stock is unlikely to disappear, given the heavy hand of the Chinese state and Alibaba’s central role in the Chinese Internet economy. There are concerns about economic growth even as China emerges from the Covid-19 lockdowns, given the weak real estate market, high commodity prices, and trade tensions with the U.S. However, we still believe that Alibaba’s stock is undervalued. At its current market price of about $104 per share, Alibaba trades at just about 14x 2023 earnings. The multiple falls to just over 10x if we exclude Alibaba’s sizable $70 plus billion in cash holdings. Alibaba is still expected to grow at a reasonable pace in the coming years. Consensus estimates point to over 8% growth for FY’23 and around 13% growth for FY’24. In comparison, Amazon trades at over 45x projected 2023 earnings, with projected revenue growth rates only slightly above Alibaba’s. Alibaba’s management also seems to think its stock is undervalued, as it recently raised its share buyback program to $25 billion up from $15 billion, marking its second increase in just about a year.
We estimate Alibaba valuation at about $148 per share indicating a potential upside of 40% over the market price. See our analysis of Alibaba revenues for more details on how Alibaba’s revenues are likely to trend.
|S&P 500 Return||1%||-13%||86%|
|Trefis Multi-Strategy Portfolio||3%||-17%||227%|
 Month-to-date and year-to-date as of 6/8/2022
 Cumulative total returns since the end of 2016