KSTR - Alibaba: Has The Stock Finally Bottomed?

• Alibaba presented June Quarter 2022 results and delivered above-consensus performance with regard to both revenues and operating income.
• One key statement stood out: that the company is seeing signs of an improving business outlook going into the September quarter.
• The market celebrated the announcement by pushing up BABA shares by as much as 7% (pre-market reference).
• Judging the market’s reaction to BABA's results, I believe the market has found a bottom for the stock.
• I remain bullish on BABA and reiterate my Buy recommendation for the stock. I slightly upgrade my target price to $150/share.

Thesis

Alibaba Group Holding Limited ( BABA , BABAF ) presented June Quarter 2022 results on August 4th and delivered above-consensus performance with regard to both revenues and operating income. For me, one key statement stood out: that the company is seeing signs of an improving business outlook going into the September quarter. The market celebrated the announcement by pushing up BABA shares by as much as 7% (pre-market reference).

Judging the market's reaction to BABA's results, I believe the market has found a bottom for the stock. The undervaluation as compared to the company's fundamentals is no secret. And now, investors are clearly looking to buy the stock. That said, I remain bullish on BABA and reiterate my Buy recommendation for the stock. I slightly upgrade my target price to $150/share in order to reflect an improving business and EPS outlook.

Alibaba's June Quarter Results

During the period April to June, Alibaba generated revenues of $30.69 billion, which indicates neither growth nor contraction as compared to the same period one year prior. But even though revenues remained flat, the performance is ahead of analyst consensus estimates, which estimated a 1.5% decrease year over year. Alibaba's income from operation was $3.7 billion, which is a decrease of about 19% as compared to the June quarter in 2021. But again, the performance is slightly ahead of analyst consensus estimates. Earnings per ADS was $1.74 versus $1.54 expected, which represents a 29% decrease year over year. Daniel Zhang, Alibaba's CEO, commented on the results as follows :

Despite the challenges posed by the COVID-19 resurgence, we delivered stable revenue performance yea-rover-year. We have narrowed losses in key strategic businesses given ongoing improvements in operating efficiency and increasing focus on cost optimization

Cash provided by operating activities was $5.1 billion, which reflects an increase of 1% as compared to the same quarter of 2021. The company's free cash flow increased by 7% to $3.3 billion.

Sales from the company's e-commerce segment amounted to $21.2 billion, reflecting a 1% decrease year-over-year. Alibaba's cloud business, however, grew by 10% year over year to $2.64 billion. Investors should note that, Alibaba's cloud growth has decelerated as compared to Q1 2022 when the segment grew 12% year over year. And in the same quarter one year prior, the segment expanded by 29%.

At this point it is worth noting that Alibaba performed in a highly challenging macro-environment in China, pressured by: inflation; international trade tensions; a real estate crisis; a regulatory crackdown on internet/tech firms; and slowing consumer confidence. Thus, Alibaba's results clearly stand out positively:

During the past quarter, we actively adapted to changes in the macro environment and remained focused on our long-term strategy by continuing to strengthen our capability for customer value creation.

The Worst Is Likely Behind

Despite Alibaba's strong quarterly performance, the company has recorded its worst topline expansion since the company's inception. In fact, the topline slightly contracted. But the market is looking beyond the past quarter and believes that Alibaba can find back to topline growth as early as in the next three months. The key statement for me was the following:

Following a relatively slow April and May, we saw signs of recovery across our businesses in June … We are confident in our growth opportunities in the long term.

Chief Financial Officer Toby Xu said during Alibaba's analyst call that he sees the :

Positive trend of recovery continuing through July

On a macro-perspective, there are strong signs that all of Alibaba's headwinds are fading. The CCP has on multiple occasions tried to communicate to investors that the internet/technology crackdown has ended. And, as premier Liu He pledged, the party is seeking to "support the healthy development of the platform economy" ( here , here , here ).

In addition, given that the economy in China is slowing, the CCP has pledged to provide more fiscal economic support - with a special focus on digitalization efforts that should be supportive for Alibaba's cloud segment. That said, while most global economies are tightening fiscal and monetary support, China is easing.

Implication And Recommendation

I am very bullish on Alibaba, as I consider the stock a bargain. And I am sure I am not alone in my assessment. In fact, talking to buy-side analysts (and even reading comments on Seeking Alpha), many market participants are waiting to buy this stock. Down almost 60% from all-time highs, I am confident that the shares are significantly derricked - despite any potential outstanding headwinds.

Alibaba shares currently trade at a one-year forward P/E of x18 . In my opinion, this is way too low for such a strong company with secular growth potential, making reference to the company's Cloud and AI business. I argue that BABA should trade at GAAP multiples of about x25 PE, which would imply a $150/share target price - in line with a residual earnings valuation framework based on analyst consensus EPS. Alibaba is a Buy.

Initiation article: Alibaba: Be Greedy When Others Are Fearful

My other articles on China ADR stocks:

• Baidu: Possibly China's Highest Valued Company By 2030
• JD.com: Excited To Buy At Prices Below $70/Share
• Tencent: Buy And Focus On The Long Term

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