Alibaba Group Holding Ltd (NYSE: BABA) is a massive online retailer operating in Asia. Its share price has been hammered over the past 18-months and is down over 50% in the past year. Is Jack Ma's 'Amazon of China' worth investing in at these levels?
What is Alibaba?
Alibaba Group is an e-commerce giant in Asia. The company name comes from the fictional character Ali Baba from One Thousand and One Nights, a collection of Middle Eastern folk tales also known as Arabian Nights. The company was named by its most famous founder Jack Ma.
In December 2021, Alibaba boasted adding 203 million consumers globally to reach 1.24 billion annual active consumers.
Who is Jack Ma?
Jack Ma Yun is a Billionaire Chinese business magnate, investor and philanthropist. In addition to co-founding Alibaba Group, he co-founded private equity firm Yunfeng Capital.
Jack Ma announced his retirement from Alibaba in 2018 to pursue philanthropic and environmental causes. He is now considered the fourth-wealthiest person in China, with a net worth of around $37bn.
Ma's star rose between 2014 and 2020. In September 2014, Ma was named the richest man in China after the Alibaba IPO in New York. He enjoyed several years of positive publicity and good fortune.
But in 2020, the tide turned after he reportedly slighted China's regulators and banks during a speech given at the annual People's Bank of China financial markets forum. This triggered a regulatory crackdown on his businesses, including Ant Group and led to Ma disappearing from the public eye. The crackdown has since spread into the wider growth tech environment in China.
How does Alibaba make money?
Alibaba makes money from several revenue sources, commerce being its main one.
Its segments are split into China Commerce, International Commerce, Local Services and Cainiao Logistic. It also has Ali Cloud, Digital Media and Entertainment and additional Innovation Initiatives.
China Commerce includes:
Alibaba's China retail marketplaces
China wholesale
New Retail businesses
International commerce includes international retail and wholesale businesses, such as:
Lazada
AliExpress
Trendyol
Daraz
Alibaba.com
Local services are location-based services, including:
Ele.me
Amap
Koubei
Fliggy
Cainiao logistics is becoming a significant stand-alone business, serving almost all of Alibaba's e-commerce businesses within its ecosystem.
Today Alibaba has eight mobile apps with over 100 million MAUs. These include:
Taobao
Taobao Deals
Idle Fish
Lazada
AliExpress
Amap
Youku
UC
However, the key to Alibaba's future margin growth appears to be its cloud business.
Five years ago, Ali Cloud was loss-making and generating RMB 1bn in quarterly revenue. Today it is profitable and generating over RMB 20bn in quarterly revenue. Nevertheless, its margins are far slimmer than its Western rivals, and it has a long way to go to compete.
Financial Overview and Metrics:
Alibaba's price-to-earnings ratio (P/E) of 18 is far below its average of 36.7. Meanwhile, its price-to-sales ratio (P/S) of 2.7 is also far below its average of 9.9. These indicate BABA stock could be cheap at its current price point. Its forward P/E is also lower than its foreign peers Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN) and Tencent. However, it also sports a much lower market cap, return on equity (ROE) and earnings per share (EPS).
P/E: 18
P/BV: 2.3
P/S: 2.7
Alibaba financial highlights (for the twelve months ended September 30, 2021)
Total Revenue: RMB 815bn (up 39% Y/Y)
China Commerce: RMB 650bn (up 41% Y/Y)
International Commerce: RMB 58bn (up 47% Y/Y)
Cloud Computing: RMB 69bn (up 37% Y/Y)
Pending Management Change
Mr. Hong Xu will succeed Ms. Maggie Wei Wu as the Chief Financial Officer of Alibaba Group, effective April 1, 2022.
BABA Stock: $186 Price Target from China Int Capital
BABA shares recently received a $186 price target from China International Capital the same day they received a $180 price target from analyst James Lee at Mizuho Securities USA. The price targets were adjusted with downwards revisions while maintaining a Buy rating on the shares.
Of 56 FactSet analysts, the consensus rating on BABA stock is a Buy with a long-term growth rate of around 9.8%.
Is Alibaba a good investment?
Many investors view Alibaba as a great investment. It is now trading below its 2014 IPO price yet it has since greatly increased its cash and revenue streams.
The company makes over $30bn a year in revenues and its cash balance exceeds $70bn. It also ranks in the top 10 list of the world's most valuable brands among Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Visa (NYSE: V), Mastercard (NYSE: MA), and McDonald's (NYSE: MCD).
Trust will be an issue for Alibaba expanding its cloud business overseas. If it does manage to conquer this market, it may grow to compete with Amazon Web Services (AWS) and Microsoft Azure.
However, China's strict regulatory environment, lack of transparency and the risk of delisting from US stock exchanges make BABA stock a risky play.
Investors are growing increasingly wary of investing in Chinese tech stocks, including e-commerce, education technology and social start-ups. However, hardware such as semiconductor and robotics stocks are still in favor as the Chinese government is yet to issue any red flags in the hard tech sector.
Considering there are thousands of US companies to invest in, many of which have been beaten down and now offer value, the added risk to investing overseas may not be worth it.
On the flip side, the regulatory risk may already be priced in to the beaten-down BABA share price, but gauging that isn't easy.
Alternatively, an ETF exposed to China could be a slightly safer option. There are many to choose from, such as:
KraneShares CSI China Internet ETF
iShares MSCI China ETF
iShares Asia 50 ETF