Alibaba (NYSE:BABA) has managed to build a solid cash position following robust profitability in recent quarters. Interestingly, the Chinese e-commerce giant’s substantial cash reserves alone position the stock for significant upside potential. While shares have traded at rather depressed levels irrespective of Alibaba’s strong underlying results, its hefty cash position could be the key catalyst for a bull run. This is due to its dual benefits: a wide margin of safety and growing capital returns. I am bullish on the stock.
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What is Going on with Alibaba’s Continuous Underperformance?
Alibaba’s consistent underperformance has become increasingly perplexing, especially in the midst of a robust market rally that has propelled the S&P 500 (SPX) to a remarkable 25% gain in the past year. In stark contrast, Alibaba’s shares have witnessed a decline of approximately 14% during the same period.
The persistent lack of bullish sentiment surrounding Alibaba’s stock is not a recent development. Despite the broader market surge, the company’s shares have remained trapped within a familiar trading range for an extended period. Remarkably, Alibaba continues to deliver impressive quarterly revenue and earnings growth, further deepening the enigma surrounding its subdued market performance.
To underscore the glaring disparity between Alibaba’s stock price and its robust financial fundamentals, consider the fact that the current stock price hovers just above $75—marginally surpassing its IPO levels from 2014. Meanwhile, the company’s financial metrics paint a drastically different picture. From Fiscal 2014 to the past 12 months, Alibaba has witnessed a staggering revenue surge from $11.42 billion to an impressive $125.31 billion, marking an elevenfold increase.
Simultaneously, its EBITDA has surged from $4.68 billion to an astonishing $24.62 billion, a growth of over fivefold. Further, Alibaba’s net cash position has skyrocketed from $10.33 billion to an impressive $51.49 billion.
This stark contrast underscores the disconnect between Alibaba’s operational achievements, robust financials, and the market’s perception of its stock. Despite the company’s consistent growth and a strengthened balance sheet, investors remain unconvinced, maintaining a bearish stance.
However, I believe that Alibaba’s substantial net cash position, in particular, holds the potential to serve as a transformative catalyst. Not only do the company’s substantial cash reserves offer investors a wide margin of safety, but they also create a promising opportunity for significant capital returns in the future.
Cash Position to Fuel Growing Capital Returns
My argument asserting that Alibaba’s formidable cash position will lead to expanding capital returns is not merely speculative; it is already a tangible reality. Alibaba’s high-margin business model consistently generates substantial cash, accumulating at an impressive rate.
In recent quarters, the prioritization of growing capital returns by Alibaba’s management has become increasingly evident, aligning with the company’s robust financial standing. This strategic shift is well-founded, considering that Alibaba’s net cash and cash positions of $51.49 billion and $78.67 billion constitute 27% and 41% of its underlying market capitalization, respectively!
Simultaneously, Alibaba is currently trading at a forward P/E of just 8.0x, presenting an undeniably depressed multiple, regardless of the perspective one adopts. Shares are trading at an appealing valuation, and Alibaba boasts a substantial cash reserve, which forms a one-way street for management to bump shareholder returns. This strategic move stands to benefit the stock in two significant ways:
Firstly, share buybacks will inject noteworthy buying volumes into the stock, serving as a natural catalyst for its upward trajectory. Secondly, repurchasing shares at the current valuation is poised to be considerably accretive to earnings-per-share growth, further strengthening the investment case for the stock.
To provide context, over the past 12 months, the company has repurchased $10.24 billion worth of stock—an appreciable increase from $8.61 billion in the preceding year. This $10.24 billion represents about 5.3% of Alibaba’s market, underscoring the potential for a substantial reduction in its share count at the current stock levels.
Recognizing that ongoing buybacks alone might not be sufficient, given the lingering depressed stock value, Alibaba recently announced its first-ever dividend alongside its September quarter results. The dividend, applicable to Fiscal 2023 and amounting to $1.00 per American Depository Receipt (ADR), translates to a dividend yield of approximately 1.3%. While not an overwhelmingly high yield, this dividend has ample room for growth and will complement the more influential share buyback program.
Considering Alibaba’s expanding financials coupled with its depressed stock price, I believe that the cumulative impact of the buyback and dividend yield will eventually become so substantial that investors can no longer overlook the stock’s investment potential.
For instance, if Alibaba continues repurchasing approximately 5% of its stock annually while offering a dividend yield exceeding, say 3%, investors may find it increasingly challenging to dismiss the stock’s potential. The tangible returns from the dividend, in the form of cold cash, are poised to significantly contribute to this realization, making management’s recent strategic move exceptionally constructive.
Is BABA Stock a Buy, According to Analysts?
While investors are skeptical, most Wall Street analysts remain bullish on Alibaba’s prospects. BABA stock earns a Strong Buy consensus rating based on 18 Buys and two Holds. At $125.92, the average price target implies an attractive upside potential of 67.3%.
The Takeaway
In conclusion, despite robust financial fundamentals, Alibaba’s consistent underperformance in the stock market remains perplexing. The stark contrast between its impressive revenue growth, strengthened balance sheet, and the market’s bearish stance underscores the disconnect.
However, the company’s substantial net cash position presents a transformative catalyst. With a strategic focus on growing capital returns, Alibaba’s management is already making tangible moves, including share buybacks and a newly introduced dividend. As these initiatives gain momentum, they have the potential to reshape investor perceptions and drive the stock’s upward trajectory, making Alibaba a compelling investment opportunity.
