I am bullish on Alibaba Group (NYSE:) due to its strong competitive advantages and balance sheet that combine with a robust growth outlook and cheap valuation to provide attractive total return potential.
Alibaba is a fast-growing ecommerce company that has managed to gain market share in countries like China, Japan and even the United States. It also provides several other services, such as cloud computing and digital media, making it a well-diversified technology-centric company. (See Alibaba stock charts on TipRanks)
Alibaba is growing rapidly, with a large consumer and seller network that form a virtuous cycle to drive growth. Alibaba has a huge customer and seller base which provides it with significant pricing power. Meanwhile it has massive amounts of data from consumers on its online and its other businesses, giving it more room for AI-driven innovation in these areas.
Alibaba delivered strong earnings results in its most recent quarter. In June, global annual active consumers across Alibaba’s ecosystem reached 1.18 billion, with 912 million of those in China alone, up by 45 million from last quarter.
Revenue increased by 34% year-over-year, though income from operations fell by 11% year-over-year and adjusted EBITDA fell by 5% year-over-year. The disconnect between revenue growth and declining profitability was largely due to aggressive investments in Alibaba’s Community Marketplaces, Taobao Deals, Local Consumer Services, and Lazada in order to drive longer term growth.
Alibaba’s China retail marketplaces had a quarterly net increase of 14 million, indicating continued increased penetration in less-developed areas and reflecting the company’s successful diversification of product offerings.
The cloud computing business saw revenue grow by 29% year-over-year thanks to strong demand from internet, financial services, and retail businesses. Management signaled guidance for increased industry and customer diversification for this business moving forward.
Digital media and entertainment also saw strong growth during the quarter, with the daily average subscriber base up 17% year-over-year, thanks to popular content offerings on the Youku platform.
While the company continues to grow, it is also plagued by tightening government regulations and scrutiny, pressuring the share price. As a result, management deployed some of the company’s massive cash pile to repurchase a growing number of shares during the quarter, spending $3.68 billion in all, while upsizing the repurchase authorization from $10 billion to $15 billion.
Given that the share price looks quite attractive here, buybacks look like they might be a good use of capital. The stock trades at a mere 2.95x forward sales, 13.51x forward EBITDA, 17.24x forward earnings, and 18.53x forward free cash flow. Meanwhile, revenue is expected to grow by 40.9% in 2021 while EBITDA is expected to grow by 24.5% in 2021 and normalized earnings-per-share are expected to grow by 24.1% in 2021. As a result, there is a major price to growth disconnect in the valuation.
Wall Street’s Take
From Wall Street analysts, BABA earns a Strong Buy analyst consensus based on 20 Buy ratings, 1 Hold rating, and 1 Sell rating in the past 3 months. Additionally, the average Alibaba price target of $272.48 puts the upside potential at 60%.
Summary and Conclusions
Alibaba is certainly not a risk-free stock, given the geopolitical risks that come along with it being headquartered and highly concentrated in China. At the same time, however, it enjoys numerous competitive advantages, and the valuation is remarkably cheap given the growth potential for the business and its stellar balance sheet.
Given that the company is buying back shares at an accelerating pace and Wall Street analysts are overwhelmingly bullish on the stock here, it might be a good time to buy, provided that investors are aware of and comfortable with the risks that come with investing in the Chinese market.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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