【Overseas naive investors eye Chinese stocks】Alibaba: Strong performance and its bargain price again

Summary

1. Alibaba Group Holding Limited $Alibaba(BABA.US) (OTCPK: BABAF) reported strong earnings that exceeded analyst expectations, but cash generation was weak; however, aggressive share buybacks continue to reward shareholders.

2. Revenue grew 5% year-over-year, with cloud computing and international digital commerce showing solid growth momentum despite a challenging consumer environment in China.

3. Adjusted EPS declined slightly, but share repurchases provided a 5% tailwind, highlighting Alibaba's commitment to returning value to shareholders.

4. Despite risks from China's real estate market and potential trade tensions, Alibaba's low valuation and growth prospects make it an attractive investment opportunity.

Alibaba Group Holding Limited $Alibaba(BABA.US) (OTCPK: BABAF) reported strong earnings results, surpassing analyst expectations for both revenue and profit. Although cash generation this quarter was below average, Alibaba continues to generously reward shareholders through buybacks. Over the past few weeks, Alibaba's stock price has pulled back, which is why BABA is once again very cheap.

I have previously written about Alibaba Group Holding Limited on Seeking Alpha, most recently a year ago when I assigned the company a Buy rating. Since then, the stock has indeed trended upward, especially between late September and early October 2024, driven by enthusiasm for China's stimulus policies, though this momentum has since faded somewhat. A year has passed since my last article on Alibaba, and with the company now reporting its latest earnings, it's time to revisit this Chinese e-commerce player.

Alibaba Group Holding Limited reported its most recent quarterly results on Friday morning. The headline numbers were as follows:

The company achieved a double beat against Wall Street analyst forecasts, which is naturally a good outcome. Compared to BABA's historical performance, this is also positive, as Alibaba has occasionally missed revenue and/or EPS expectations over the past two years.

However, the market reaction was not positive, with the stock down 3% at the time of writing. Weakness in the broader market on Friday morning may partly explain the relatively muted stock performance post-earnings. Investors may also be dissatisfied with BABA's cash generation during the period—more on this later.

Alibaba's Earnings Results: The Good and the Bad

Starting with Alibaba Group's revenue, we see a 5% year-over-year increase. This isn't hypergrowth, but it's a solid result considering:

Alibaba's valuation is very low, so the market isn't pricing in high growth.
Chinese consumers are currently under pressure due to concerns about the real estate market, which weighs on spending. In this environment, mid-single-digit growth isn't bad.
Alibaba has become a massive company, making it increasingly difficult to sustain high relative growth rates. Many other companies, including Apple Inc. (AAPL), have seen growth inevitably slow over time—AAPL's recent growth rate was very similar to BABA's at 6%.

Given these factors, I don't consider Alibaba's 5% revenue growth a bad result in absolute terms. Growth also accelerated compared to the previous three quarters, suggesting favorable momentum for BABA. While this doesn't guarantee further acceleration, I believe it's a strong possibility.

Revenue growth across Alibaba's business segments was uneven, with cloud computing growing at a higher-than-average 7% year-over-year. While this isn't as strong as Amazon.com, Inc. (AMZN) or Alphabet Inc. (GOOG, GOOGL), there are positives. Management noted double-digit growth in public cloud last quarter, so overall cloud growth could accelerate as this segment expands. AI-related products grew at triple-digit rates, which is certainly good news.

Although Alibaba isn't widely seen as a major AI player, this data shows the company can still benefit from the AI trend. If current growth rates hold, this could become a key driver of future revenue and earnings growth.

Alibaba's international digital commerce business also grew faster than the company average, with revenue up 29%, albeit from a small base. Quarterly revenue was about $4.5 billion, accounting for just over 10% of total revenue. Continued growth here could help lift overall business growth in the coming years. Management cited investments in Europe and parts of the Middle East as growth drivers, and I expect these to continue, supporting strong growth for BABA's IDC business.

Of course, growth alone doesn't guarantee strong returns—profits matter more. Here, BABA's performance was less impressive, with adjusted earnings slightly down year-over-year and adjusted EBITDA declining 4%. Management attributed this to increased growth investments—we'll see if these pay off in future quarters. On a GAAP basis, Alibaba delivered a reasonable 5% operating income growth. The divergence between stronger GAAP growth and weaker adjusted growth can be explained by lower stock-based compensation expenses, which are excluded from adjusted results.

On an adjusted basis, BABA's net income per share (technically per ADS) was $2.15, slightly down year-over-year. However, the decline in EPS was smaller than the decline in net income due to Alibaba's aggressive share buybacks, which reduced the share count significantly over the past year. Overall, buybacks provided a 5% tailwind to EPS—quite strong compared to, say, AAPL's famous buybacks, which reduce shares by about 3% annually.

Last quarter, Alibaba continued its aggressive buybacks, spending another $4.1 billion to repurchase shares, roughly 2% of its market cap. I like BABA's buyback aggressiveness—there's no good reason to hold tens of billions in cash on the balance sheet without using it to create shareholder value.

Unfortunately, cash flow wasn't as strong: operating cash flow totaled $4.5 billion for the quarter, or $18 billion annualized. While this is a solid figure in absolute terms and relative to the company's ~$200 billion market cap, it was below the year-ago level. Management attributed this to increased investments in areas like international digital commerce and AI cloud products. If true, this is a temporary dip and not a cause for concern, but I'd like to see improvement in future quarters.

BABA: Cheap Again, But Not Risk-Free

In late September and early October, enthusiasm for China's stimulus spending drove BABA to $118 per share. Since then, the stock has pulled back significantly. Now, with shares below $90 again, BABA is very cheap. Based on current year estimates, BABA trades at just 10x P/E. For a company with a strong franchise, excellent market position, AI exposure, and some business growth, this is not a high valuation.

Alibaba isn't without risks: exposure to Chinese consumers means a worsening real estate downturn is a risk, and escalating U.S.-China trade tensions could also negatively impact Alibaba. These risks shouldn't be ignored, but I don't think they make BABA uninvestable—it can have a place in a diversified portfolio.

Aside from below-average cash generation, the results look solid. Revenue growth has picked up compared to recent quarters, BABA's valuation is very low, and buybacks remain strong. I'm overall bullish on BABA. I sold my BABA position during the late-September rally (missing the top) but may re-enter in the coming days.

Disclosure: I/we have a beneficial long position in GOOG through stock ownership, options, or other derivatives. This article is my own work and expresses my own views. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company mentioned in this article.

I may initiate a position in BABA in the coming days.

Note:This article was originally published by Jonathan Weber on seekingalpha.com on November 15, 2024. It is reposted here for educational purposes only and does not constitute a recommendation or endorsement of any securities, industries, or markets. I am not responsible for any losses incurred by individuals or institutions as a result of using this report.

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