MSFT - Alibaba: Don't Let Beijing Or SoftBank Rain On The Parade

2023-04-15 08:00:00 ET

Summary

• We remain bullish on Alibaba; we see favorable entry points for long-term investors.
• We’re constructive on Alibaba rolling out its own generative AI bot, Tongyi Qianwen; we’re not too surprised that China is tightening the regulatory collar around AI capabilities.
• Despite SoftBank selling off most of its Alibaba stake and CAC regulatory scrutiny, the stock is up roughly 20% since we published our buy-rating on the stock.
• We recommend long-term investors begin looking for entry points into the stock at current levels.

We continue to be buy-rated on Alibaba (BABA). The stock is up roughly 20% since we first published our buy-rating back in late November, outperforming the S&P 500, despite hurdles along the way. We see favorable entry points into the stock after SoftBank (SFTBY) reduced its stake in Alibaba to 3.8%, and Chinese stocks dropped in response to Beijing's AI control proposals. We see Alibaba outperforming in the mid-to-long run, driven by its new AI chatbot rivaling OpenAI's ChatGPT and the rebound of the e-commerce space as China reopens more fully. The following graph outlines our rating history on Alibaba stock.

Near-term hurdles for long-term gains

Alibaba shares dropped nearly 9% Wednesday, alongside JD.com ( JD ) and PDD Holdings (PDD), among others, after the Cyberspace Administration of China ((CAC)) proposed regulations on AI service providers. The CAC outlined that companies would have to pass a governmental security review in order to provide AI services. We're not too surprised that China wants to tighten its regulatory collar around the multi-billion generative AI market, estimated to grow at a CAGR of 35.6% between 2023-2030. The news came on the same day that Alibaba unveiled its own generative AI bot similar to ChatGPT, Tongyi Qianwen. We're cautious about how China's regulations will impact (or limit) the AI space potential in China but still don't believe investors should let the news overshadow Alibaba's Tongyi Qianwen and its plans in the AI space going forward.

Alibaba joined the AI chatbot frenzy by introducing Tongyi Qianwen- its own generation AI bot that'll have Chinese and English language capabilities and will be integrated into the company's products and services; a similar approach to Microsoft's ( MSFT ) plans to incorporate AI into Bing and an AI-assisted chatbot "Microsoft 365 Copilot" into its office tools. Alibaba announced its first steps would be integrating its chatbot into DingTalk, the company's workplace communication software, and Tmall Genie, a provider of smart home appliances. We're constructive on the massive opportunities in the generative AI space; so far, the chatbot will be available to enterprise customers for beta testing, and the public rollout should follow in the coming months.

Alibaba Cloud has been named a visionary in Gartner Magic Quadrant for Cloud Infrastructure and Platform services for the second year in a row. We believe Alibaba rolling out its own AI service pushes forth its position as a leading tech company competing with MSFT, Amazon (AMZN), and Alphabet (GOOG). We also believe the company's cloud computing-related infrastructure sets a good foundation (computing power, data, and training models) needed for AI development.

Chinese tech companies are racing to launch domestic versions of ChatGPT. Chinese multinational tech company Baidu gave a peek at its own version of ChatGPT called "Ernie," but it remains unclear if the company's chatbot will meaningfully compete with ChatGPT. While China's regulatory measures should not be dismissed, we don't expect governmental review and regulations to halt AI development in China entirely. We don't believe China can afford to fall behind the U.S. in its AI technological capabilities, especially as the "Chip War" between the two nations persists. We also believe it's important to watch out for potential U.S. regulations on AI services from China going forward. We'll continue to monitor Alibaba's AI plans and the impact of regulations toward 2H23.

What's up with SoftBank?

Japanese group, SoftBank, jumped on a selling spree of its Alibaba shares to limit its exposure to China and in attempts to break even on its tech investments amid a troubling macroeconomic environment. Alibaba's anchor shareholder, SoftBank, shrank its stake to 3.8% while it previously once owned as much as 34%. The company sold about $7.2B worth of shares through prepaid forward contracts, which allow SoftBank "the option to buy back the shares…." The following graph outlines SoftBank's stake in Alibaba.

We're not too concerned about SoftBank's selling behavior, specifically while it still holds the option to buy back shares. We see SoftBank's gradual exit from Alibaba as an attractive opportunity for long-term investors to jump into the stock.

Valuation & Word on Wall Street

We believe Alibaba's stock is relatively cheap. Based on Alibaba's current enterprise value and its revenue TTM ending December 2022, the company's EV/Revenue is 1.57x , while Amazon's EV/Revenue is 2.18x . Despite the near-term headwinds, we see favorable entry points into Alibaba stock at current levels.

Wall Street shares our bullish sentiment on the stock. Of the 51 analysts covering the stock, 46 are buy-rated, four are hold-rated, and the remaining are sell-rated. The stock is currently priced at $96 per share. The median and mean sell-side price targets are $145, with a potential upside of 51%.

The following tables outline Alibaba's sell-side ratings and price targets.

What to do with the stock

We're buy-rated on Alibaba. The stock has had a rough month so far, with CAC regulatory proposals on the AI space and SoftBank selling a bulk of its shares through prepaid forward contracts. We believe CAC's proposed protocols on AI services were inevitable and that Alibaba is better positioned to outperform in the mid-to-long run as it works through near-term hurdles. The stock price remains volatile in the near term, but we recommend investors begin looking for favorable entry points into the stock at current levels.

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