Considering an international stock that has stumbled over the past five years, one can’t help but think of Chinese e-commerce powerhouse, Alibaba. While the S&P 500 has seen a remarkable upsurge, Alibaba stock has taken a nosedive, plummeting nearly 60% during the same period.
Despite the significant decline in stock value, Alibaba has shown commendable growth in revenue and earnings. In its latest quarter ending December 2023, the company reported revenue of $36.7 billion and adjusted earnings per ADS of $2.67. These numbers mark a stark improvement from its performance in December 2018 when it recorded revenue of $17.1 billion and EPS of $1.77.
Let’s delve into the reasons behind this downturn and speculate on the trajectory Alibaba might follow in the next five years.
The Downward Trajectory
Alibaba’s downward spiral in the past half-decade can be linked to the struggles of the Chinese stock market as a whole. The S&P China 500 has witnessed a 24% dip over the same period, exacerbated by prolonged COVID-related lockdowns that have crippled the Chinese economy.
Adding to its misfortunes, the Chinese government launched crackdowns on tech entities, slapping Alibaba with hefty fines for alleged monopolistic practices and regulatory infractions. Concurrently, the absence of its iconic founder, Jack Ma, who took a step back from the public eye following criticisms of the government, has further dented Alibaba’s reputation and stability.
The collective impact of a sluggish stock market, regulatory hurdles, and the departure of its visionary leader has been instrumental in dragging Alibaba’s stock to its current low.
Valuation and Prospects
Despite its woes, Alibaba presents an intriguing proposition with a forward P/E ratio of just over 8, positioning it as a value stock in the market landscape. Often dubbed as the ‘Amazon of China,’ Alibaba’s valuation stands at a significant discount compared to its American counterpart, which boasts a forward P/E ratio of nearly 43.
Of particular interest is Alibaba’s substantial net cash reserves of $68.6 billion and its robust free cash flow generation of approximately $25 billion annually. With such solid financial footing, Alibaba’s intrinsic value seems poised to outweigh its current market capitalization of $176 billion in the coming years.
The company has toyed with the idea of dividing itself into six distinct entities, each operating under separate leadership and potentially pursuing IPOs for individual ventures. This restructuring plan, albeit delayed, aims to realize the untapped potential of businesses like Hema and Cainiao, which could garner higher valuations if detached from the core Alibaba umbrella.
Future Outlook
With its robust cash reserves and strong cash-flow generation, Alibaba stands on the brink of a potential uptrend in the next five years. A probable shift towards a holding company model hosting various publicly traded ventures could unlock latent value for investors, with each business receiving individual valuation based on its growth trajectory.
Furthermore, signs of economic stabilization in China, highlighted by a resurgence in the manufacturing sector after successive months of decline, bode well for Alibaba’s diverse consumer-focused and logistics initiatives.
Alibaba’s proactive stance on investing in AI technology to enhance operational efficiency hints at sustained progress, despite facing constraints due to U.S. export restrictions on critical components.
The path ahead appears promising for Alibaba as a sound investment proposition, albeit shadowed by geopolitical tensions and inherent risks associated with its Chinese domicile.