We came across a bullish thesis on Alibaba Group Holding Limited (BABA) on Substack by BlackSwanInvestor. In this article, we will summarize the bulls’ thesis on BABA. Alibaba Group Holding Limited (BABA)'s share was trading at $85.12 as of Jan 17th. BABA’s trailing and forward P/E were 17.73 and 8.85 respectively according to Yahoo Finance.
Alibaba Group, often dubbed the “Amazon of China,” has long been a dominant player in the e-commerce and technology sectors. While it shares similarities with Amazon, especially in its diverse portfolio spanning e-commerce and cloud computing, the company's strategic approach is shaped by the unique economic and regulatory environment of China. The story of Alibaba, however, cannot be separated from the macroeconomic context of China, where stocks, including Alibaba’s, have faced significant devaluation since mid-2021. This downturn was largely precipitated by the company’s co-founder, Jack Ma’s, public clash with the Chinese government in 2020, which led to a series of regulatory crackdowns. Coupled with broader issues such as the Chinese property crisis, geopolitical tensions, COVID-19 challenges, and a slowdown in economic growth, these factors significantly impacted Alibaba’s valuation, leading to a sharp drop from its peak in 2020.
Alibaba’s structure, akin to Amazon’s, is a sprawling conglomerate with various revenue-generating segments. The core pillars of Alibaba’s business include Taobao and Tmall Group, which serve as the primary retail arm, Alibaba Cloud, which handles its cloud computing services, and Cainiao, which provides logistics. Additionally, the company has ventures in international e-commerce (AIDC), local services (e.g., food delivery and navigation apps), and digital media and entertainment. While these various segments contribute to the company’s overall revenue, Taobao and Tmall Group are by far the most profitable, accounting for 41.4% of revenue. Alibaba Cloud, the company’s cloud computing segment, though still emerging in terms of profitability, shows significant potential and has seen rapid growth in recent quarters.
Despite the growth of Alibaba Cloud, the company remains highly reliant on its domestic retail operations for profitability. This dependency sets it apart from Amazon, where the AWS cloud segment has become a major contributor to both revenue and profitability. Taobao and Tmall benefit from higher margins than Amazon’s retail segment, bolstering the company’s cash flow. In contrast, the other segments like Cainiao and AIDC are still in growth phases and have yet to meaningfully contribute to the bottom line. Cainiao, while profitable, operates in a competitive market with thin margins, and the AIDC segment, despite showing growth in revenue, has not yet proven its profitability model.
Alibaba’s international retail segment, AIDC, remains a key area to watch. Although it reported a 29% year-over-year revenue increase, the segment has yet to achieve profitability, posting significant losses in recent quarters. This makes the AIDC segment a risky venture, especially given the intense competition in global e-commerce markets. On the other hand, the cloud computing division has turned a corner, becoming profitable in recent quarters and is expected to grow rapidly, potentially following a similar trajectory to AWS in its early years. Given the rising demand for AI capabilities, Alibaba Cloud is poised to be one of the company’s biggest growth drivers in the near future.
While the company's various segments show promise, some areas remain underwhelming. The Local Services and Digital Media and Entertainment segments continue to struggle with profitability, and there are few signs of significant improvements in the near term. These businesses are likely to remain small contributors to the overall business, unless China’s economic situation improves considerably. The "Others" segment, though generating substantial revenue, operates with low margins, similar to Amazon’s e-commerce arm, and has shown consistent losses over the past few years.
From a valuation perspective, Alibaba appears significantly undervalued. Various valuation methods, including discounted cash flow (DCF), price-to-sales (P/S), and price-to-earnings (P/E), all suggest that the stock is trading well below its intrinsic value. Even under conservative growth scenarios, Alibaba’s stock price could appreciate substantially. The pessimistic scenario, assuming no meaningful economic recovery in China, values the stock at $121.24, while a more optimistic outlook, assuming positive effects from China’s stimulus and accelerated growth, places the value at $171.37. With an average composite fair market value of $132.23, Alibaba appears to be a compelling value investment at current prices.
Ultimately, Alibaba is positioned as a value play with considerable upside, particularly driven by the growth of its cloud computing segment and the international e-commerce venture. While the company faces headwinds due to the broader Chinese economic environment, its fundamentals remain strong, with consistent profitability and a solid growth trajectory in key areas like cloud computing and AI. Given its undervaluation, Alibaba presents an attractive investment opportunity with significant upside potential, provided the macroeconomic environment stabilizes and the company continues to execute on its strategic goals.
Alibaba Group Holding Limited (BABA) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 115 hedge fund portfolios held BABA at the end of the third quarter which was 91 in the previous quarter. While we acknowledge the risk and potential of BABA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BABA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
