Alibaba Group (NYSE: BABA) has faced turbulent times lately, witnessing a steep decline of nearly 60% in its stock value over the past five years. Despite this downturn, billionaire co-founder Jack Ma expressed confidence in the company and its restructuring endeavors. Ma acknowledged past missteps but highlighted the transformative effect of dividing the company into six distinct divisions, leading to enhanced agility and a sharpened focus on customer needs.
Unleashing a River of Cash Flow
Amidst its challenges, Alibaba has demonstrated a remarkable ability to churn out a substantial amount of cash flow consistently. In the fiscal third quarter ending in December, the company boasted an operating cash flow of $9.1 billion and a free cash flow of $8 billion. Over the first nine months of the fiscal year, Alibaba raked in $22.4 billion in operating cash flow.
This robust cash flow position equips companies with the flexibility to reinvest in growth initiatives or engage in strategic acquisitions. Alibaba has actively pursued share repurchases, initiating a $25 billion buyback program in tandem with its fiscal Q3 results in February. The company promptly executed on this authorization, repurchasing $4.8 billion in shares within the first three months of 2024. In total, Alibaba has bought back $23.3 billion in shares over the past two years.
Furthermore, Alibaba is focusing on bolstering its core businesses – e-commerce and cloud computing – to rekindle growth. In the e-commerce realm, the company is enhancing price competitiveness, service quality, and user experience. It aims to enrich its product offerings by incorporating more branded and directly sourced items on its platform, along with flexible models for suppliers to ensure competitive pricing.
Moreover, Alibaba is investing in augmenting the end-to-end customer experience, from pre-sale interactions to logistics. Additionally, the company is in the nascent stages of testing its internally developed large language model (LLM) for artificial intelligence (AI), with an emphasis on enhancing search and advertising functionalities.
With regards to its cloud computing segment, Alibaba is shifting customers away from low-margin project-based contracts towards its public cloud services. It is scaling up investments in AI-related hardware and software while expanding infrastructure to support the burgeoning demand for AI-driven computing power.
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Navigating Choppy Waters
Chinese companies face constraints in the AI domain due to U.S. restrictions on cutting-edge GPU technologies from companies like Nvidia. Consequently, Alibaba might not reap immediate AI-related benefits enjoyed by U.S. cloud computing giants such as Microsoft and Alphabet. Additionally, Alibaba has slashed cloud computing prices to entice AI developers to its data center services, presenting a short-term challenge amid long-term AI growth prospects.
In the e-commerce arena, Alibaba has had to make price adjustments to combat the surging popularity of rival PDD Holdings and its Pinduoduo platform, which has rapidly garnered market share. Despite the intense competitive landscape catalyzed by PDD’s success, Alibaba’s T-Mall and Taobao platforms remain stalwarts in Chinese e-commerce, particularly excelling in the high-end market segment.
The subdued performance of the Chinese economy post-pandemic lockdowns has also dampened Alibaba’s results. However, signs of economic recovery in the first quarter, coupled with supportive measures from the Chinese government, bode well for Alibaba’s outlook. Notwithstanding, inherent risks persist despite potential economic rebounds.
A Diamond in the Rough
Alibaba’s valuation emerges as a standout feature, trading at an approximate 9x forward P/E ratio, significantly undervalued for a company that has witnessed a 9% revenue growth over the past nine months while boasting substantial cash flow generation.
While a bargain valuation alone does not warrant investment, Alibaba’s underpriced status, coupled with its proactive share buyback initiatives and investments to fuel growth, signify an attractive proposition. Despite associated risks, the stock’s upside potential over the ensuing years appears alluring, given these compelling attributes. Hence, Alibaba stock presents a compelling buy opportunity at present.
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