Alibaba's Resilience: Cautious Optimism Amid Challenges and Opportunities

3 Reasons I'm Cautiously Optimistic About Alibaba's Recovery

There are early signs that the worst could be over for Alibaba. The last few years have been tough for Alibaba (BABA -1.30%) and its investors as the company has struggled with multiple issues, such as intense competition, the ongoing crackdown by the Chinese government, and the weak economy. As the company announced its latest earnings results last week, shareholders (myself included) hope to find some signs of stabilization from its recent numbers. Fortunately, some positive indicators suggest that the recovery is on track. Taobao and Tmall delivered commendable progress Alibaba's core e-commerce business has been a massive success for most of its existence, but lately, it has faced enormous pressure from younger companies like PDD Holdings and Douying. It doesn't help that the Chinese economy has struggled to regain its prior growth momentum since the COVID-19 pandemic. To turn around its business and grow again, Alibaba's new management team has shifted its focus to delighting its end users -- it historically focused more on serving the merchants -- focusing on areas like lower prices and better user experience by leveraging artificial intelligence (AI) and its massive supply chain resources. While it's still early days, some green shoots suggest the company's strategy is working. In the latest quarter, the e-commerce company reported double-digit growth in online orders and a high single-digit growth in gross merchandise value (GMV). Besides, Alibaba's premium members improved by double digits to 42 million during the quarter. These improving metrics suggest a stabilizing market share (and mind share) of Chinese consumers. A series of efforts, including more competitive prices, improving customer service, and membership benefits helps improve customer satisfaction. Similarly, AI helps in areas like user-to-product matching, further enhancing product recommendations and price competitiveness. Ultimately, all of these improvements lead to better user satisfaction. Still, I'm closely monitoring the company's performance in the next few quarters before declaring victory. Other ventures delivered promising improvements While the Chinese e-commerce business remains the biggest revenue generator for the tech giant, it's increasingly relying on other segments to sustain its growth machine. The good news is that most of these younger ventures have performed well in the latest quarter. For example, Alibaba's overseas e-commerce business segment -- led by AliExpress, Trendyol, and Lazada -- reported a solid 32% growth in revenue, thanks to the development of cross-border and local e-commerce sales. Similarly, Cainiao Logistics grew 16% during the quarter as it leveraged the growth of cross-border e-commerce deliveries . It's also worth mentioning that Alibaba's cloud computing business is seeing growth picking up again. Revenue grew by 6%, but that figure was masked by its diversion away from low-margin project-based revenue to high-quality public cloud revenue. In fact, public cloud products grew by double digits and could improve further in the coming quarters. Alibaba needs to grow these ventures to rekindle its high-growth trajectory and reduce its over-reliance on local e-commerce business. Besides, some of its businesses, such as cloud computing, have so much potential that they could one day surpass the e-commerce segment in size and profitability -- just like Amazon Cloud, which is the biggest profit generator for Amazon. Alibaba is aggressively buying back stock Another critical point to mention is that Alibaba continued to buy back significant amounts of its stock in the latest quarter, spending $5.8 billion to buy back 2.3% of its total shares. This is on top of the dividends paid earlier in June. On one level, the share buyback improves the per-share earnings for the remaining shares, enhancing the value of the shares for existing investors who remain invested. On a deeper level, it suggests that the company is serious about its promise to enhance shareholder value. After its recent buyback, Alibaba still has $26.1 billion authorized in its share repurchase program that will last until March 2027. If executed, this repurchase program will be highly value accretive to investors. What it all means for investors Alibaba's recent quarterly revenue growth of 4% is nothing to shout about. However, looking deeper into the recent numbers suggests that the tech giant is heading in the right direction in its turnaround efforts. It just needs some time for that to bear fruit.

Alibaba Keeps On Rewarding Investors As New Silver Linings Emerge (NYSE:BABA)

Despite concerns by many analysts, a more hawkish foreign policy by the next administration in the US could be a tailwind towards Alibaba stock by reducing geopolitical uncertainty. Alibaba Group Holding Limited's (NYSE:BABA) recent earnings did not meet expectations in terms of revenue estimate. However, Alibaba stock has pushed higher over the last few days as the extreme bearish sentiment towards the company reduced. There were several silver linings in the recent earnings which should impress long-term investors. Alibaba is rewarding investors through massive buybacks. In the recent quarter, the company purchased $5.8 billion worth of stock which expunged 77 million shares or 3.2% of the outstanding 2.4 billion shares. On an annualized basis, this is equal to more than 12.8%. Alibaba has another $26 billion within its current buyback program. The massive FCF should allow the company to maintain the current investment in buybacks. In the previous article, it was mentioned that Alibaba's new growth initiatives could provide an additional tailwind to the stock. On the other hand, Alibaba's cloud business has started showing better margins. The EBITA for cloud business increased to $322 million or $1.2 billion on an annualized basis with 155% YoY growth. The EBITA margin in the cloud segment has increased from 3.5% in the year-ago quarter to 9% in the recent quarter. The revenue share of international commerce has increased to 12% of the consolidated revenue base and is growing at a rapid pace which should reduce the geographic risk. EPS estimates for the next two years show double-digit growth which should boost sentiment as the company improves the growth trajectory outside the Taobao and Tmall segments. The elephant in the room is the geopolitical risk which has pushed down the valuation multiple of all China-based stocks. Many analysts believe that the next administration in the White House could have a more hawkish foreign policy which might hurt Alibaba and other Chinese stocks. However, a more hawkish foreign policy could reduce the geopolitical uncertainty which in turn could end up being a good tailwind for Alibaba stock. Alibaba has ramped up its investment in share repurchases. In the recent quarter, Alibaba spent a staggering $5.8 billion on share repurchase which reduced the share count by 77 million. The outstanding shares now stand at 2.37 billion. In a single quarter, Alibaba reduced the outstanding shares by 3.2% or 12.8% on an annualized basis. The company produced FCF of $24 billion in the trailing twelve months. It has ramped up investment in Alibaba Cloud but the current FCF should allow the company to continue the share repurchase program. The remaining amount in the share repurchase program was $26 billion. Figure: Increase in share repurchase by Alibaba in the last few quarters. Source: Alibaba Filings This buyback pace should help improve the EPS trajectory over the next few quarters. The EPS estimate for the next two fiscal years shows a double-digit growth. The EPS estimate for the fiscal year ending March 2026 is $9.88 which gives it a forward PE of only 8.6. The forward PE for the fiscal year ending March 2027 is 7.86. Even if the company delivers low single-digit revenue growth in its core business, the buybacks should allow Alibaba to gain good EPS growth. There are enough resources to continue the current buyback pace and the rock-bottom valuation multiple could make the management invest more in buybacks. Figure: EPS estimate of Alibaba in the next few years. Source: Seeking Alpha Despite missing revenue and net income estimates in the recent earnings, Alibaba has reported several strong metrics that can boost sentiment in the near term. One of the key growth drivers for Alibaba is the cloud business. The company has reported EBITA of $322 million in cloud business or $1.2 billion on an annualized basis. In the year-ago quarter, the Cloud business reported an EBITA of RMB 916 million or 3.5% EBITA margin. In the recent quarter, the EBITA margin has increased to 9% which is more than 5 percentage points higher than the year-ago quarter. This shows the ability of the company to rapidly increase margins despite high competition within the domestic market. The cloud revenue was $3.6 billion and it reported 6% YoY growth. This shows that the EBITA margin for cloud business has increased to 9% from a negative margin a few quarters back. However, Alibaba can still expand this margin. We have seen Amazon.com, Inc.'s (AMZN) AWS continue to deliver an operating margin of close to 30% for a number of years. Alibaba has been trying hard to improve the EBITA margin in the last few quarters. A Bloomberg report mentioned that the company had completed layoffs of 20,000 in 2023. While the slowdown in revenue growth in core business is a headwind, Alibaba has tried to improve its margins and profitability. It is highly likely that Alibaba would be able to close the gap with AWS as it continues to invest in new tools and chips. The international commerce business is another strong segment for the company. It reported revenue of $4 billion in the recent quarter. This is 12% of the consolidated revenue base of $33 billion. The YoY growth rate of international commerce is 32% which should help increase the revenue share of this segment. If the current trend continues, international business could contribute over 20% of the revenue share by the end of the next fiscal. This should reduce the geographic risk associated with the stock and possibly improve the valuation multiple. One of the key reasons keeping Alibaba stock low is geopolitical uncertainty. Many bearish analysts have pointed out that the next administration could be more hawkish in its foreign policy which would hurt the sentiment towards the stock. However, there is a major fallacy in this argument. A more hawkish foreign policy by the White House should reduce geopolitical uncertainty. Wall Street hates uncertainty and a clear foreign policy guidance could end up helping Alibaba and other China-based stocks. This is counter-intuitive, but a very hawkish administration can prevent regional issues from turning into a big escalation. It is difficult to quantify this theory, but we have seen in the past few decades that a strong foreign policy from the White House can reduce geopolitical tensions in key regions. It should be noted that during the previous White House administration, Alibaba stock increased from $90 in 2017 to $300 by the last quarter of 2020. Figure: Stock performance of Alibaba, JD, and Tencent during the previous administration. Source: YCharts The above chart shows the strong performance of Alibaba and other Chinese stocks during the previous administration. Despite the rhetoric, a very hawkish policy in the previous administration reduced the geopolitical uncertainty. This helped Alibaba as the stock was priced based on fundamentals instead of external factors. Alibaba did not meet the revenue and income estimates of Wall Street in recent earnings. However, the stock has still gained close to 10% post earnings in the last few days. One explanation is that Alibaba has moved away from the worst-case scenario. It has also reported good numbers in key segments like cloud, international commerce, Cainiao, and Local Services Group. The core e-commerce business continues to be a drag in terms of revenue growth, but the margins are still quite good. Rapid improvement in Cloud margins should improve the overall EBITA and EPS trajectory for the company. Almost all Chinese stocks are reporting low YoY revenue growth as the economy in China continues to underperform. However, Alibaba has a number of tailwinds working in its favor. The rapid increase in the revenue share of international commerce should reduce the geographic risk. Alibaba's massive buyback program increases the likelihood that the company will post double-digit EPS growth as the outstanding shares are reduced quickly. We could also see better cloud revenue growth as new AI tools are launched by Alibaba. A poor performance by the economy can also force the government in China to increase fiscal measures. We have already seen some support for the property sector. This could boost customer confidence and be a tailwind for Alibaba. Finally, a more hawkish foreign policy by the next White House administration could reduce the uncertainty surrounding geopolitics in this region. There are still several risks associated with Alibaba. One of the key risks is the lack of revenue growth in core commerce which is pulling down the overall growth metrics. Another risk is that if the situation in Taiwan escalates it would significantly hurt the sentiment towards the stock. However, it is likely that the positives far outweigh the negatives and with a rock-bottom valuation, Alibaba stock looks quite attractive. Alibaba has missed estimates in the recent earnings, but the stock has gained close to 10% in the last few days as the market focuses on the positive numbers. The cloud division is showing rapid profit margin growth which should boost the overall profitability. The increase in the revenue share of international commerce also reduces the risk associated with Alibaba. At a forward PE ratio of less than 10, the stock looks attractive. The company has strong FCF and is investing heavily in share repurchases which should boost the EPS growth significantly. The geopolitical risks are a concern, but there are strong fundamental tailwinds that can deliver a good upside for the stock in the next few quarters.