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BABA:Cheap Enough To Buy

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Carter West wrote a column · May 10, 2023 10:33
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Alibaba has fallen by more than 30% since the beginning of the year, and its forward PE has reached 10X. Alibaba's e-Commerce prospects are also cheap relative to those of other e-Commerce firms in China as well as Amazon (AMZN). Alibaba has the lowest P/E ratio even when compared against other Chinese e-Commerce firms such as JD.com (JD) and Pinduoduo (PDD), suggesting that Alibaba's downward revaluation has gone too far.
BABA:Cheap Enough To Buy
Alibaba can afford a major up-size in its stock buyback
The e-Commerce company increased its stock buyback authorization from $15B to $25B in the first quarter of 2022 ,effective through March 2025. Alibaba spent $3.3 billion on share repurchases in the previous quarter which allowed the company to buy back 1.75% of outstanding stock.the recent quarter, the company invested $3.3 billion in share buybacks which expunged 45 million ADSs out of 2.6 billion outstanding ADSs. The company has another $21 billion in current authorization to buy back shares which would expunge 10% of outstanding stock at current price.
Alibaba has healthy free cash flow which should allow further ramp-up of buybacks and lead to better EPS despite slower overall growth in revenue.Even in last year’s deteriorating operating environment, Alibaba generated 98.87B Chinese Yuan ($15.60B) in free cash flow.After the Chinese economy fully reopens, I believe Alibaba could relatively easily generate $5B a quarter in free cash flow... which is even less than its 5-year average free cash flow of $5.92B.
Alibaba repurchased $10.6B of its shares in 2022. The current market value of Alibaba is 215.6 billion US dollars, and the annual repurchase amount is equivalent to 5% of the market value.
The International commerce segment
In the previous quarter, the International commerce segment reported YoY growth of 18%. Some of the subsidiaries controlled by Alibaba like Lazada in Southeast Asia and Trendyol in Turkey are showing a very good growth trajectory.
These international businesses can grab market share from other local competitors due to the strong financial and technical support of Alibaba. Sea Limited (SE), Lazada’s main competitor in Southeast Asia has seen 80% erosion in market cap due to massive losses. This reduces the competitive pressure on Lazada and should allow the company to improve market share and margins.Alibaba has set a target of $100 billion in GMV for Lazada. This shows the growth potential of international business. International Commerce makes up 8% of the revenue base of Alibaba.
Cloud computing service price reduction
On April 26, Alibaba Cloud announced the largest price reduction in history. The price of core products was reduced by 15%-50% across the board, and the price of storage products was reduced by up to 50%. The price adjustment will take effect on May 7.
1)Alibaba Cloud cut prices to consolidate its leading position in domestic cloud computing. According to the IDC report, in the second half of 2022, Alibaba Cloud will rank first in the domestic public cloud service provider market, but its market share in IaaS+PaaS will drop from 36.7% in the same period of the previous year to 31.9%. In recent years, the cloud computing business of the three major operators is rising rapidly. In 2022, the revenue growth rate will double year-on-year, and the gap is constantly narrowing. Alibaba Cloud has achieved adjusted EBITA profitability for several consecutive quarters. However, due to the impact of the external environment, the growth rate of revenue has been slowing down. FY21/22/23E were 51%/23%/8% respectively. This price cut will help Alibaba Cloud further penetrate into customers in non-Internet industries. At present, non-Internet industries account for more than half of the contribution and become the main growth driver of Alibaba Cloud. At the same time, Ali's price reduction may trigger a new round of price war in the cloud computing industry, and the actual effect remains to be seen;
2) Alibaba Cloud’s large-scale price reduction also benefits from its own cost advantages. In the past ten years, Alibaba Cloud has reduced computing costs by 80%, and storage costs have dropped by nearly 90%. The price reduction and product opening may further attract users, expand the market size, and bring greater price space. But at the same time, price cuts may put some pressure on profit margins.
In short, Alibaba's current price is significantly lower than its fair value. The buyback makes it safe enough. The recovery of China's economy in the first quarter and the growth potential of the cloud computing market make it deserve a higher price.I think the biggest risk to suppressing valuations right now is politics.
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