We previously covered Alibaba Group Holding Limited (NYSE:BABA) in November 2023, discussing its excellent CQ3’23 performance in the Cloud and e-commerce segments, since we believed these two segments might be the company’s long-term growth drivers.

We had also added a small position then, with us believing that the summit between Biden and Xi was likely to thaw market sentiments surrounding Chinese ADS, especially with the stock already nearing its lowest-ever recorded P/E valuation of 8.30x.

In this article, we shall discuss why BABA remains a Buy, though only for patient investors with a long-term investing trajectory.

With the geopolitical headwinds amounting through the chips trade ban/ solar tariffs/ TikTok’s potential ban along with the uncertain restructuring efforts, we believe that the stock may remain the poster child of the bears’ continued dominance over Chinese ADS.

The BABA Investment Thesis May Remain Discounted, Prior To Reversal In Market Sentiments

BABA 2Y Stock Price

For now, BABA has dramatically lost much of its 2022 and 2023 gains, with it appearing to retest the previous support levels of $70s.

While it has successfully bounced from the January 2024 bottom of $68s, the stock has also traded sideways since then, with minimal momentum for recovery despite the massive share repurchases thus far.

For context, BABA has repurchased 65M of ADS shares for $4.8B in CQ1’24 and a total of 156M of ADS shares/ -6.8% of its float for $12.5B over the last twelve months, effectively returning great value to its existing shareholders.

With approximately $30.5B left in its existing share repurchase program, we may see the company further retire another -17.5% of its float, assuming that its share prices remain at these levels.

At the same time, BABA is still well capitalized to retire even more of its shares moving forward, subject to the Board decision, due to the growing net cash of $72.94B on its balance sheet as of CQ4’23 (+35.6% YoY).

Despite so, we are not certain if it is wise for the management to embark on such an endeavor, despite the supposed $156M saved in annual dividend payouts based on the last announced $1 per ADS.

For example, when Amazon (AMZN) announced their 20-for-1 share split and upsized $10B buyback in March 2022, the stock had jumped in reaction by +10%, implying a positive sentiment shift surrounding the stock.

The same uptick had also been observed with Google (GOOG), after the $70B worth of share repurchase authorization was announced in April 2023, along with Microsoft’s (MSFT) $60B buyback in September 2021 and Meta’s (META) $50B buyback in February 2024.

In contrast, as BABA’s stock remains sluggish between the trading range of between $70s and $77s despite the dividend and share repurchase announcements, we believe that the bears may have temporarily won the narrative here, with geopolitical headwinds likely to remain a major concern.

At the same time, BABA’s highly publicized restructuring in March 2023 has yet to take place as expected, with the management offering to buy the balance of Cainiao’s stake by March 2024 instead of pursuing the original IPO plans in Hong Kong.

In addition, the management had cancelled the planned Cloud IPO by November 2023, with the Alibaba Cloud consistently recording lower market share of 4% as of CQ4’23, down from the 6% reported in CQ4’21.

It is apparent from these numbers that Alibaba Cloud has failed to capitalize on the ongoing generative AI hype, attributed to the +3% YoY revenue growth reported in CQ4’23, compared to the major wins reported by its US-based cloud peers and the +11% YoY growth reported by its Chinese-based competitor, Baidu (BIDU).

Combined with the shelved IPO plans for the grocery segment, Freshippo, it appears that BABA’s restructuring efforts may have been a non-event indeed, with the market similarly underwhelmed.

If anything, BABA’s crown jewel, e-commerce through Taobao and Tmall Group, has also underperformed with +2% YoY revenue growth in CQ4’23, compared to the impressive double-digit growth reported by its up and rising competitor, PDD (PDD), at +56.8% YoY in CQ4’23.

The Consensus Forward Estimates

As a result of these developments, it is unsurprising that the market has lowered their forward estimates, with BABA expected to report at a top/ bottom-line expansion at a decelerating CAGR of +8%/ +8.2% through FY2026.

This is compared to the previous estimates of +10.6%/ +9.9% and the historical CAGR of +36%/ +18.4% between FY2016 and FY2023, respectively.

With relatively underwhelming growth prospects, we can understand why the BABA stock continues to trade sideways over the past six months indeed.

So, Is BABA Stock A Buy, Sell, or Hold?

BABA Valuations

The same pessimism has also been observed in BABA’s extremely discounted FWD P/E valuations of 8.82x and FWD Price/ Cash Flow of 9.92x.

This is compared to its 3Y pre-pandemic mean of 28.41x/ 20x, its direct US-based peers, such as AMZN at 44.96x/ 16.63x & GOOG at 23.66x/ 15.77x, and Chine-based peers, such as BIDU at 9.49x/ 7.66x & PDD at 14.29x/ 13.56x, respectively.

Author’s Historical Rating

On the one hand, while we have been highly optimistic about its eventual reversal, as observed in our last two Buy ratings, it is apparent that BABA’s turnaround may take longer than expected as discussed above.

On the other hand, with robust Free Cash Flow generation of over $20B annually, we believe that shareholder equity is bound to gradually improve from the $56.95 reported in CQ4’23 (+1.9% QoQ/ +4.1% YoY).

If anything, BABA’s valuations remain cheap compared to its historical ranges and its direct peers, likely to trigger an improved upside potential upon the eventual re-rating.

For example, based on the LTM adj EPS of $8.73 and the FWD P/E valuations of 8.82x, the stock seems to be trading near our fair value estimates of $76.90.

Based on the consensus FY2026 adj EPS estimates of $9.55 and a moderate upward re-rating in its FWD P/E nearer to its Chinese-based peers mean of 10.28x, we are looking at an excellent upside potential of +37.6% to our base case long-term price target of $98.10.

Assuming a bullish re-rating in BABA’s FWD P/E valuation nearer to the sector median of 15.31x, we are looking at an extremely bullish long-term price target of $146.20, implying an aggressive doubling upside potential from current levels.

While the $1 per ADS dividend may not seem much based on the forward yields of 1.34%, we believe that the token sum is a bonus for investors who are looking to ride the great upside over the next few years.

As a result of the attractive risk/ reward ratio, we are maintaining our Buy rating here.

It goes without saying that BABA’s execution has been relatively underwhelming compared to its peers, with the management already looking to “adopt a more aggressive approach towards competition in order to win growth,” particularly to “reignite the growth of its two core businesses, e-commerce and cloud computing.”

As a result, anyone tuning into its upcoming CQ1’24 (FQ4’24) earnings call on May 16, 2024 may want to closely monitor its profit margins, with the management likely to report higher SG&A/ R&D expenses/ capex to better support Alibaba Cloud’s differentiated sales/ service systems and lower gross margins attributed to Taobao/ Tmall’s increased promotional activities.