Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alibaba, a prominent Chinese e-commerce, logistics, and technology infrastructure firm, has been one of the most disappointing international stocks in recent years. Despite the S&P 500's significant 80% increase over the past five years, Alibaba's stock has plummeted by nearly 60%.
Despite this decline, Alibaba has managed to achieve growth in both revenue and earnings. In its most recent quarter ending December 2023, the company reported revenue of $36.7 billion and adjusted earnings per American depository share (ADS) of $2.67, a marked improvement from its performance in December 2018, when it recorded revenue of $17.1 billion and earnings per share (EPS) of $1.77.
Several factors have contributed to Alibaba's underperformance in the last five years. The lackluster performance of the overall Chinese stock market during this period, with the S&P China 500 declining approximately 24%, has played a significant role. Moreover, prolonged COVID-related lockdowns in China have had a lasting impact on its economy compared to other countries.
In addition to economic challenges, the Chinese government's crackdown on tech firms has further weighed on Alibaba's stock. In 2021, the government imposed a hefty fine of over $2.5 billion on Alibaba for monopolistic practices, while its affiliate Ant Group faced a fine of nearly $1 billion for violating banking regulations the following year. Furthermore, the departure of Alibaba's founder, Jack Ma, from public life in 2019, following his criticism of the Chinese government in 2020, has also affected investor sentiment.
In summary, a combination of factors, including a weak Chinese stock market, regulatory pressures, slowing growth, and the absence of the company's influential founder, has contributed to the downward trajectory of Alibaba's stock.
With a forward price-to-earnings ratio (P/E) of just over 8, Alibaba currently presents itself as a value stock. Often likened to the Amazon of China due to their similar business models, Alibaba stands apart from Amazon in terms of valuation, with a substantial gap between the two. Amazon trades at nearly 43 times its forward P/E, highlighting Chinese-specific risks as a significant factor in this disparity. Notably, not long ago, Alibaba traded at a forward P/E in the range of 20 to 30.
A critical aspect to consider with Alibaba is its robust cash position and free cash flow generation. As of the end of 2023, the company boasted $68.6 billion in net cash while generating approximately $25 billion in free cash flow annually. Over the next five years, Alibaba's cash-flow generation coupled with its existing net cash reserves could potentially surpass its current market capitalization of $176 billion.
Alibaba has explored the possibility of restructuring into six separate businesses, each with its CEO, pursuing individual initial public offerings (IPOs) and financing. However, this plan has faced delays, with market conditions not aligning with the intrinsic value of the businesses, including its superstore Hema and Cainiao logistics business. Additionally, Alibaba scrapped plans to IPO its cloud business last November due to US export bans on AI chips to China.
Given its substantial cash reserves and cash-flow generation, it would be reasonable to expect Alibaba to trade at a significantly higher price in five years. There is also the likelihood of the company transitioning into a holding company structure, with several publicly traded individual businesses. Such a restructuring could unlock value for shareholders, as each business would likely command higher valuation multiples based on its growth prospects.
The stabilization of the Chinese economy, evidenced by the recent return to growth in the manufacturing sector after five months of declines, bodes well for various consumer-facing and logistics businesses within Alibaba. Furthermore, Alibaba's commitment to investing in AI technology to enhance its operations suggests continued progress despite challenges posed by US export curbs.
Against this backdrop, Alibaba appears poised to be a sound investment over the next five years. However, geopolitical tensions and country-specific risks, particularly in the context of US-China relations, warrant careful consideration as they could potentially impact the company's stock performance.
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As long as the price is above 70.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 72.82
- Take Profit 1: 80.00
- Take Profit 2: 85.00
Alternative scenario:
If the level of 70.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 70.00
- Take Profit 1: 66.00
- Take Profit 2: 60.00
