Alibaba (NYSE:BABA) is likely to see market sentiment on its stock reverse from here, which can be attributed to the company’s persistent growth. Shares of the Chinese e-commerce and technology conglomerate are trading at the same levels they did during its IPO about nine years ago. Simultaneously, however, Alibaba’s ever-lasting growth has translated to shares becoming increasingly cheaper.
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This theme emerged once again in its most recent results, with Alibaba posting robust growth. Yet, shares stayed muted. Accordingly, I am bullish on BABA stock.
Lasting Growth amid a Tough Environment
Over time, Alibaba has navigated through a complex and uncertain geopolitical landscape. The stock’s prolonged underperformance can be mostly attributed to this factor.
However, when we look beyond the intricacies of politics and drama, Alibaba’s actual financial results have been quite remarkable. The stock may still be trading at the same levels it did back in 2014, but its revenues have grown massively since then. Particularly, in Fiscal 2014, Alibaba reported revenues of $8.45 billion. In the last twelve months, revenues amounted to $123.7 billion. That’s roughly 14.6x growth in less than a decade!
Such a prolonged revenue growth record might imply that the company must have entered a maturity phase. Yet, the pace of Alibaba’s growth remains at satisfactory levels. In its most recent Q1-2024 results, the company achieved revenue growth of 14% to $32.3 billion, kicking off Fiscal 2024 on a high note.
Growth was driven by strength across all of Alibaba’s businesses. Let’s discuss those businesses below.
The Taobao and Xianyu Divisions
Alibaba’s Taobao and Xianyu divisions are not often discussed, but they have been a great source of growth for the company lately. Its Chinese online shopping app, Taobao, posted average daily active users (DAU) growth of 6.5% year-over-year, resulting from effective user acquisition programs and improved retention. Xianyu, Alibaba’s marketplace for secondhand, recycled, for-rent, and vintage products, also continued to grow rapidly, posting DAU growth of 18%.
Alibaba International Digital Commerce Group
Alibaba’s core businesses also posted exceptional results, with its International Digital Commerce Group seeing its retail businesses achieving order growth of 25%. AliExpress posted robust order growth, driven by an increase in the number of transacting users and enhanced consumer experience. In the meantime, Lazada, one of Alibaba’s e-commerce platforms with a leading position in Southeast Asia, also posted double-digit order growth year-over-year due to improved user monetization.
Finally, Trendyol, Alibaba’s e-commerce platform specializing in the market of Turkey, continued to post strong order growth powered by growth in both its e-commerce and local consumer services businesses. Most importantly, by achieving robust revenue growth and lasting improvement in operating efficiencies, Trendyol was able to post positive operating income for the first time ever during the quarter.
Local Services Group & Cainiao Smart Logistics Network
Most investors are familiar with Alibaba’s core platforms like Aliexpress, but few seem to be aware of the company’s Local Services Group & Cainiao Smart Logistics Network divisions. Local Services operates platforms like Ele.me, Alibaba’s food delivery app. Amap, a leading mobile digital map app for navigation and real-time traffic information in China, is also included in this segment. Following strong user growth, revenue in the segment grew by 35%.
Alibaba also saw significant growth in its Cainiao Smart Logistics Network division, Alibaba’s logistics network. Revenue from Cainiao grew 34% year-over-year, powered by growth in Alibaba’s international fulfillment solution services as well as domestic consumer logistics services.
Cloud Intelligence Group
Finally, Alibaba’s Cloud Intelligence Group, one of its flagship businesses, demonstrated consistent growth, highlighting the increasing demand for cloud services. Despite China’s economic slowdown, the division achieved a respectable 4% revenue growth rate in a cost-conscious environment. This resilience suggests the potential for a robust rebound once the economy recovers.
Strong Profitability Highlights Discounted Valuation
As I mentioned earlier, Alibaba’s strong growth against its stagnated stock price has led to its valuation becoming increasingly discounted over time. With the company posting robust growth across the board, profits also grew nicely. Besides benefiting from improved margins, the company also achieved its first positive operating income from Trendyol, as noted earlier. Thus, Alibaba’s adjusted earnings per ADS (American depository share) jumped to $2.40, up by a significant 48% compared to last year.
Following a strong start to Fiscal 2024 and last year’s momentum, Wall Street expects that adjusted earnings per ADS for the full year will land close to $9.00. This implies growth of roughly 16% compared to Fiscal 2023. I find this estimate quite conservative based on Aliababa’s Q1 results. But regardless, it still indicates that the stock is trading at an incredibly discounted valuation, as it suggests a forward P/E of just 11. This multiple is nowhere near those that Alibaba’s U.S. e-commerce and cloud peers feature.
Can Share Repurchases Fix Alibaba’s Steep Discount?
Alibaba’s leadership is aware of the significant undervaluation at which Alibaba’s stock is currently trading. Consequently, they have taken decisive action to counter it by aggressively executing their share repurchase program. For context, during Fiscal 2023, Alibaba repurchased a record $10.9 billion worth of stock, around $1.2 billion more than in Fiscal 2022. Share repurchases are likely to be substantial this year as well since the company bought back $3.1 billion worth of stock in Q1 alone.
Buybacks represent a strategic move by Alibaba, serving to not only stabilize the stock price but also make a significant, positive impact on the company’s earnings per ADS. Given the current attractive valuation levels, Alibaba can efficiently repurchase and retire a substantial portion of its shares, thereby reducing the total share count and enhancing its per-share metrics. Alibaba has already reduced its share count by approximately 6.1% over the past two years, with the pace accelerating.
What Do Analysts Say about BABA Stock?
Moving to Wall Street’s general view on the stock, Alibaba Group Holding currently has a Strong Buy consensus rating based on 15 Buys and one Hold assigned in the past three months. At $141.31, the average BABA stock forecast implies 49.6% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell ATD stock, the most accurate analyst covering the stock (on a one-year timeframe) is Rob Sanderson of Loop Capital Markets, with an average return of 15.2% per rating and a 59% success rate. Click the image below to learn more.
The Takeaway
Overall, Alibaba’s enduring growth story continues to contrast with its stagnated share price. Its solid revenue growth and profitability, coupled with a discounted valuation, form a compelling case for investors.
Further, with the company’s share repurchase program, we may see a gradual narrowing of the gap between its stock price and what might be considered “fair” value. Along with the possibility of clouds of uncertainty parting in the medium term, Alibaba stock is likely to stand poised for a strong rebound. Accordingly, I will keep holding my shares in Alibaba and remain bullish on the company’s outlook.
