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Alibaba (BABA US)

MM mentioned Alibaba early in the month hence it’s not one of our 4 picks today but it would be if we hadn’t discussed it previously.

Alibaba like much of the Chinese market has been battered since Jack Ma underestimated how much the Chinese government was prepared to interfere with the running of his business – Xi Jinping et al are not people to play dare with. Regulators forced Ant Group to suspend/abandon its record $US34.5bn IPO in Hong Kong & Shanghai and things haven’t looked as rosy since for BABA which endured a 77% decline in just over 1-year.

NB Alibaba owns ~33% of the Ant Group which operates the very popular mobile payments app Alipay in China.

The regulator driven sell-off by Chinese tech saw the stock drop 16% alone in February but this is a cashed-up and profitable business which has just announced an increase of its stock buyback to $US25bn, certainly great timing from a share price perspective considering where it’s been over the last few years. Firstly let’s consider its earnings report delivered last month:

  • Revenue increased 13% to $US28.2bn but quarterly profits were down 22% compared to this time last year.
  • On consensus numbers, revenue will increase by 19.5% in FY22 relative to FY21 and another 15% in FY23

Clearly a mixed set of numbers but it’s hard to justify the share price until we consider the stand over tactics of the Chinese regulator e.g. the failed Ant IPO and $US2.8bn fine after an anti-monopoly probe. However, this is a company with a 5-year annualized earnings growth rate of 25% which may have hit some hurdles with a slowdown of its core e-commerce business but it looks a lot like Amazon on the cloud-computing front and this is a booming business area. We simply believe the stocks very cheap from a valuation basis trading well under 20x and a 30-50% bounce is very easy to comprehend.

MM likes BABA under $US120
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Alibaba (BABA US)
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