Alibaba Is One of the Cheapest E-Commerce Stocks Around
When digging through out-of-favor names, Alibaba Group Holding Ltd. (NYSE:BABA) stands out as one of the cheapest.
Company Profile
The Chinese e-commerce, technology infrastructure, entertainment and logistics company operates in several segments.
Its largest segment is its Taobao and Tmall Group, which accounts for over 40% of its revenue. Taobao is China's largest digital retail platform that caters to individual and small business merchants. Tmall, meanwhile, is an online marketplace that tends to serve large international and Chinese brands.
The company also has an international commerce segment that has several platforms. Its best-known is AliExpress, which connects consumers directly with manufacturersand distributors in China. It also owns Lazada, an e-commerce and logistics network in Southeast Asia, and Trendyol, an e-commerce platform in Turkey.
Alibaba also has several other businesses. It runs an infrastructure-as-a-service cloud platform, similar to Amazon's (NASDAQ:AMZN) AWS and Microsoft's (NASDAQ:MSFT) Azure. It has a consumer logistics business that offers last-mile delivery and well as a fulfillment hubs. It has a local consumer service business that offers on-demand delivery, as well as online travel and restaurant guide services. The company also has an entertainment division that includes a movie studio and video hosting service, among other ventures.
Valuation
Alibaba currently trades at an enterprise value/Ebitda multiple of 2.70 times fiscal 2025 (ending March) consensus of $30.39 billion. Based on 2026 Ebitda projections of $33.30 billion, it trades at a 2.5 times multiple.
On a price-earnings basis, the company trades at 7.3 times the 2025 consensus of $9.61 and 6.6 times the 2026 consensus of $10.65.
Revenue is projected to grow over 8.5% in 2025 and 5.8% in 2026 after growing 9.5% this fiscal year ending in March. Excluding its $73 billion in net cash, it trades 4.30 times 2025 earnings per share and 3.80 times 2026 estimates.
Alibaba trades at a big discount to its U.S. counterpart Amazon, as well as fast-growing rival PDD Holdings (NASDAQ:PDD). It trades at a slight premium to fellow Chinese e-commerce company JD.com (NASDAQ:JD).
Notably, Alibaba now trades at a price lower than its initial public offering price in 2014, despite growing revenue tenfold and earnings fivefold during that time.
Opportunities and risks
Alibaba is being valued as a distressed company in trouble, not a leading bellwether in the world's second-largest economy. It is anything but a distressed company, though, with $73 billion in net cash and short-term investments in its coffers. It is also still growing with revenue up 13.9% in its fiscal first quarter ended June and growing 8.5% in its fiscal second quarter ended September.
Now gross margins have come down considerably from pre-pandemic levels, when they were in the mid to upper 40% range. However, they have stabilized and were up 180 basis year over year in the first half to 38.60%.
Adjusted Ebitda, meanwhile, has been growing strongly, increasing 32% in its June quarter and 18% in its September quarter.
With a boatload of cash, solid cash flow generation and an extremely cheap stock price by any measure, buying back stock is one opportunity for Alibaba. The company repurchased $9.5 billion worth of shares in 2023, but it can certainly get more aggressive as it only reduced its share count by about 3%.
Now part of the reason behind Alibaba's weak stock performance, as well as that of rival JD.com, has been the emergence of PDD. The company's Pinduoduo platform, which lets group buyers get discounts on everyday goods, has seen huge growth over the past year and a half. To try and counter the success of its rival, Alibaba's Taobao and Tmall platforms, as well as JD.com, introduced large subsides to third-party merchants during popular Chinese shopping holidays to draw them to the platform. It has since moved to an everyday low price strategy. The end result so far has been a pricing war that has seen PDD still emerge as the winner, with growth greatly outpacing Alibaba and JD.com.
Alibaba has seen other setbacks as well. It scrapped plans to IPO its cloud computing unit after the U.S. banned the export of certain high-powered GPU chips to China. It has also had to pour money into its Southeast Asian e-commerce unit Lazada to fend off competition from the likes of TikTok and Shopee.
When it comes to opportunities, an improving Chinese economy could go a long way in helping the Chinese e-commerce giant out. The Chinese economy was expected to get a boost coming out of Covid lockdown restrictions that were lifted in 2023. However, the economic recovery has been slower than expected. The economy picked up to around 5.20% growth in 2023, up from 3% in 2022, but it was still some of the slowest growth the country has seen in three decades. Growth, meanwhile, is expected to slow to 4.50% this year.
As a result, the Chinese stock market as a whole preformed pretty poorly in 2023, with the CSI 300 index down about 11% and Hong Kong's Hang Seng off 14%. Meanwhile, the rest of the world was seeing stocks soar, with the MSCI World index climbing 22%, showing the huge divergence in performance between China and other stock markets. That has left the Chinese market as a whole relatively cheap, and companies like Alibaba particularly inexpensive.
Another opportunity the company will look to take advantage of is artificial intelligence. While a chip ban will impact it some, the company is committed to bringing AI innovation to its Taobao and Tmall platforms, as well as to its cloud business.
During its third-quarter earning call, CEO Yongming Wu said:
Regarding driving growth with AI, we see a fundamental paradigm shift underway in computing worldwide. We stand at the inflection point in this shift from traditional computing to AI computing. In the future, incremental demand for cloud computing will be driven by demand for AI and most AI computing will run on the cloud. Going forward, we will do 2 things. First, we will build the most open cloud in the AI era, providing stable and efficient AI infrastructure for all industries and enabling all sectors to go intelligent. Second, we will build an open and prosperous AI ecosystem. At the recently concluded Apsara Conference, we announced a comprehensive upgrade of our AI infrastructure, the artificial intelligence platform PAI and our large model Tongyi Qianwen 2.0, which has hundreds of billions of parameters as well as 8 vertical models, also a one-stop model application development platform, Alibaba Cloud Bailian. In this AI era, we now have in place a full stack cloud computing system for AI development and are ready to better support demand for AI-driven computing power.
Despite restrictions on some high-power chips, I do not expect Alibaba and other Chinese tech companies will be left out in the cold when it comes to AI. Given its heft, the company still is in a strong position to be a leader in using AI to help improve its businesses.
If the Chinese economy does not recover and continue to slow, however, that is certainly a risk. Another risk would be if the government were to break the company up due to its size, or if China were to pull back from the rest of the world due to geopolitical factors.
Conclusion
Alibaba is one of the cheapest large-scale tech-oriented and e-commerce companies in the world. Its valuation has gotten to unprecenteded levels, and while the company is not firing on all cylinders and is dealing with intense competition, it is still nicely growing its business and has a stock pile of cash.
No doubt it will take time to turn around the size of a company with so many units like Alibaba. However, for a stock trading at well under 3 times Ebitda with a fortress of a balance sheet and solid growth, it is hard to imagine the stock not being a winner in five years, barring a black swan type of event.
This article first appeared on GuruFocus.
