Ali Baba: Why is not everything so clear with his future (Baba)

alibaba group (New York Stock Exchange: Alibaba) It is a global technology group founded by Jack Ma in the late 20th century and eventually called the “Chinese Amazon”. However, the work of one of the world’s leaders in e-commerce and cloud computing is more than that Like a combination of PayPal (PYPL), Amazon (AMZN) and eBay (ebay), allowing it to benefit from the synergies of its affiliates. Jack Ma’s innovative approach to business development and broad ecosystem have made Alibaba a key player in the digital economy, driving retail trends and providing technologies that improve the quality of life for hundreds of millions of people.

Since the rapid spread of COVID-19, the Chinese authorities have adopted a zero-tolerance policy, which has led to large-scale lockdowns and other restrictive measures, which has positively affected online sales and greatly increased interest in cloud services from large enterprises. On the other hand, the The epidemic allowed Alibaba to increase its dominance in the market, but on the other hand, the company’s growing influence on the Chinese economy became one of the reasons for the regulatory pressure on the industry from the Chinese authorities.

On October 24, 2020, at the Bund Finance Summit, Jack Ma added fuel to the fire by criticizing the Chinese authorities and pointing out the need for reforms in favor of China. The criticism did not go unnoticed by the founder of Alibaba, and the Ant group, which at that time was striving for public advertising, was the hardest hit. Ant Group is an Alibaba subsidiary that provides customers with various financial services, and its Alipay payment platform is used by more than 1.2 billion people. in 2021, The Central Committee of the Communist Party issued a plan by the end of 2025, calling for the regulation of a large part of the economy. Ant Group became one of the companies that the Chinese regulator looked at, which eventually led to its restructuring and Separate the consumer loan business in a separate structure.

Realizing that the battle against the ‘Red Emperor’ was useless, Ma returned to China after more than a year of exile In March 2023Which may indicate the end of a sharp conflict between him and the government. In addition, the return of the founder of Alibaba to his homeland may increase the confidence of businessmen in the actions of Xi Jinping after his recent election to the position of General Secretary of the Communist Party of China for a third term.

We can already see the billionaire taking steps to develop the tech conglomerate and his desire to increase shareholder value. So, At the end of March 2023Alibaba has announced plans to divide its empire into six business divisions.

Many investors view Alibaba as a mature e-commerce company with many subsidiaries and projects that generate negative cash flow and marginal revenue, ultimately hurting its margins and share price.

We believe that the potential split of Alibaba and the retention of initial public offerings for each business division will significantly increase the company’s market capitalization, which is currently near multi-year lows. A prominent representative helped by the restructuring of the company through a subsidiary is General Electric (GE). Over the past year, General Electric’s share price has jumped by more than 100%, and criticism and indifference on the part of investors who have long negatively assessed the future of the American company have faded away.

on May 18, 2023Alibaba released its financial results for the fourth quarter of fiscal year 2023, which, despite exceeding Wall Street analysts’ expectations and increasing net income year-on-year, showed a decline in revenue in the Chinese commercial sector, which is an important sector. in the company structure. As a result, since the beginning of 2023, Alibaba’s share price has shown a decline of about 6.4%, but at the same time, the share prices of major competitors in the retail industry such as MercadoLibre (MELI), eBay and Amazon have managed to achieve this. Show more favorable dynamics.

We started our coverage of Alibaba with a “Hold” rating for the next 12 months.

Alibaba financial center

Alibaba’s revenue for the first three months of 2023 was $30.32 billion, down 15.6% from the previous quarter and 5.8% from the fourth quarter of fiscal 2022. Since the start of 2021, Alibaba’s revenue has hovered around an average of $31.97 billion, and It is far from always able to beat analyst consensus estimates, which ultimately leads to continued downward pressure on the company’s stock price.

The main reasons for the company’s lower revenue are the slow pace of China’s economic recovery and stiff competition from e-commerce companies such as Pinduoduo (PDD) and JD.com (JD). Daniel Zhang’s initiatives, such as the development of the Taobao Deals and Taocaicai platforms, which operate on a manufacturer-to-consumer model and continue to expand the range of products, still do not contribute significantly to the increase in overall sales of the Chinese trade sector.

Overall, Alibaba’s revenue is expected to recover and will be between $29.95 and $32.47 billion for the first quarter of fiscal year 2024, up 6.3% from analysts’ expectations for the fourth quarter of fiscal year 2023. However, we believe actual revenue will be less than consensus due to trends negativity in the Chinese economy.

According to China’s National Bureau of Statistics, retail sales of consumer goods totaled 3,491 billion yuan in April 2023, down 7.8% from the previous month and reaching the lowest level in the past 10 months. Even after the zero-tolerance policy for COVID-19 ends, consumers are not inclined to deviate from saving behavior and start spending excess savings more actively.

Moreover, a Bloomberg article published on May 22 reported that a new wave of COVID-19 had begun in China, and according to chief health advisor Zhong Nanshan, the number could reach 65 million cases per week as early as June. As a result, the virus could slow the recovery of consumer activity in China. On the one hand, this will have a positive effect on reducing global inflation, but on the other hand, it will slow down the recovery of the Chinese economy, which will ultimately hurt the revenues of the Chinese trade sector.

At the same time, over the past quarters, revenues from the cloud sector, which Alibaba’s management relies on and which is one of the most promising and diversified sectors, has continued to decline, and most importantly, it has not yet met investors’ expectations.

On the quarterly call for the fourth quarter of fiscal 2023, Alibaba’s CEO said the following.

External factors include impact from a large customer using our cloud service and shifting to self-build infrastructure for their international business.

As a result, we believe that with hybrid cloud projects lagging behind, and one of Alibaba’s largest customers also leaving, cloud segment revenue will show mixed trends over the next 12 months.

Alibaba’s gross margin reached 33.32% in the first three months of 2023, up slightly from the previous year, thanks to lower production costs and a resolution to the global supply chain crisis. We expect that by the end of 2023, the company’s gross margin will increase slightly to 35.5%, and by 2024 it will increase to 36.7%, thanks to the continued recovery of the global economy.

Unlike Alibaba’s main competitors such as JD.com, MercadoLibre, and Amazon, the company’s net income margin is much higher than theirs. In the fourth quarter of fiscal year 2023, it was 11.36%, down 7.58% from the previous quarter. Alibaba’s earnings per share for the first three months of 2023 were $1.52, up 28.8% year-on-year, and, importantly, it continued to beat analyst consensus estimates in recent quarters. The effective use of Alibaba’s share repurchase program is one of the main reasons that positively influenced the emerging trend. Over the past six months, Alibaba has bought back its shares for about $5.38 billion, while Daniel Zhang still has the option to buy back shares of the company up to $19.4 billion, which is enough, in our opinion, to support the price of Alibaba shares over a period. A period of potential geopolitical upheaval in Asia.

Alibaba’s first-quarter earnings per share is expected to be in the $1.59-$2.33 range, up 48.5% on average from the fourth-quarter estimate for fiscal year 2023. At the same time, Alibaba’s share price is Non-GAAP P/E. [TTM] is 10.55x, which is 11.96% below the average for the sector and 61.28% below the average for the past five years, one of the factors pointing to the company being undervalued by Wall Street.

At the end of March 2023, Alibaba’s debt totaled about $23.5 billion, down about $4.2 billion from 2021. But due to the company’s recent decline in EBITDA, the total debt/EBITDA ratio increased indefinitely relative to Alibaba’s financial position from 1.16 times. to 1.38 times

With a total cash and short-term investment of $76.37 billion, we don’t expect Alibaba to have any problems repaying large notes and bank borrowings, and the company will be able to continue to pursue an active share buyback program and invest in the cloud sector.

Conclusion

The Alibaba Group is a global technology conglomerate founded by Jack Ma in the late 20th century and eventually dubbed the “Chinese Amazon”. Jack Ma’s innovative approach to business development and broad ecosystem have made Alibaba a key player in the digital economy, driving retail trends and providing technologies that improve the quality of life for hundreds of millions of people.

Although Jack Ma returned to his homeland after a year of exile due to a conflict with the Chinese government, Alibaba’s share price has been under downward pressure since 2020 for several reasons. The first is the decline in revenue and net income margin of the company, despite the implementation of various initiatives by Daniel Zhang, which still have not borne fruit. In addition, in recent quarters, the possibility of a military conflict between China and Taiwan is increasing, and in this case, we expect a sharp decline in the total volume of retail sales of consumer goods and a decline in Chinese economic activity, which will eventually lead to a significant deterioration in Ali’s financial position. Baba.

Also, we believe that the US presidential elections, scheduled for November 5, 2024, will lead to tougher rhetoric from US politicians, who are likely to choose containing China as one of the main themes of their campaigns. The reason for this is the public opinion according to which most Americans consider China a serious threat to the United States. As a result, the steps taken by the company’s management to further develop the technology conglomerate and its desire to increase shareholder value may not lead to the desired results. So, at the end of March 2023, Alibaba announced plans to divide its empire into six business divisions, followed by IPOs for each of them. However, increased regulation by the Chinese Communist Party and rising tensions between the US and China may only dampen the appetite of large investors to invest in the tech conglomerate.

We commenced our coverage of the BABA stock with a “Hold” rating for the next 12 months.

Editor’s note: This article discusses one or more securities that are not traded on a major US stock exchange. Please be aware of the risks associated with these stocks.