2023-03-27 07:01:38 ET
Summary
- Jack Ma has returned to China, a positive development to help improve business sentiments in China's private sector after its unprecedented regulatory clampdown.
- China's consumption growth has seen signs of recovery. As China's leading e-commerce platform, it should improve Alibaba's ability to meet analysts' estimates.
- Alibaba Cloud is still the most significant market share leader in China's cloud computing space. It seems ready to leverage its scale to bolster its growth in Cloud AI.
- BABA's price action is constructive, as we noted a bullish reversal that helped defend against further downside risks. Its valuation also has a significant margin of safety.
Alibaba Group Holding Limited ( BABA ) Jack Ma was reported to have returned to China. He visited a school in Hangzhou that he founded to discuss OpenAI's ( MSFT ) ChatGPT's impact on the education industry.
Chinese leaders and entrepreneurs likely welcome his return after spending the past year abroad, engaging in activities such as " researching agriculture technology."
Bloomberg reported recently that the Chinese authorities have "attempted to persuade" Ma to return to demonstrate Beijing's "support for the business community."
China's private sector remains scarred by the regulatory clampdown over the past two years, worsened by the collapse in consumer sentiments and the property market during the COVID lockdowns.
However, Ma's return is largely symbolic and not expected to help lift Alibaba's near-term revenue and profitability drivers. Notwithstanding, it does help portray a more positive outlook for foreign investors that China is keen to return its private sector to a more solid footing.
Notably, China has fallen out of the " top three investment priority" among the US business community for the "first time in 25 years." US investors are understandably cagey about China's recovery, as Chinese President Xi Jinping tightened his control after the recent legislative conference.
Moreover, the still frosty ties between US President Joe Biden and Xi have likely held back further buying sentiments from investors.
In addition, China's recovery from its COVID opening has been uneven. Bloomberg reported that China's industrial profits declined 22.9% YoY from the January to February period.
As such, China's nascent recovery still suffers from challenges in " higher-than-expected unemployment," worsened by the still weak property market and tepid exports.
However, China's policymakers have highlighted that they expect consumption to be the critical bedrock driving China's economic growth in 2023. State planners have penciled in a 5% GDP growth target, even though the economists' consensus expects a 5.3% increase.
Therefore, as China's largest e-commerce platform, we believe Alibaba's role will be critical to help drive its recovery.
Recent consumption spending data in China has been constructive, as " China's biggest consumer brands have seen a boom in demand." As such, it augurs well for Alibaba to continue its progressive recovery in revenue and profitability through CY2023.
The revised Street estimates see a 2.6% revenue growth for Alibaba for FY23 (year ending 31 March 2023). However, coupled with easier comps and a potentially more robust H2CY23 for China, analysts expect Alibaba to post topline growth of 10.7% for FY24 (year ending 31 March 2024).
In addition, China's cloud computing market is also likely to see faster growth than last year. According to DIGITIMES' most recent estimates, China's cloud market is projected to post growth of 12% in CY23, above last year's 10% growth.
By far, Alibaba is the dominant player, with a 36% market share (Vs. second-placed Huawei's 19% share). Therefore, we believe it remains well-positioned to leverage the recovery in China's cloud market, even though growth remains tepid.
In addition, with Alibaba's scale advantage over its closest peers, a move to drive " value-added content delivery and database services" could also help to lift its cloud margins over time.
Amazon ( AMZN ), Microsoft, Oracle ( ORCL ), and Google ( GOOGL ) are working closely with Nvidia ( NVDA ) to pursue the latest breakthrough in Cloud-based AI supercomputing. These developments are expected to fuel the next stage in cloud computing growth as companies gear themselves up for the generative AI revolution.
Nvidia CEO Jensen Huang highlighted in a recent interview that he's keen to bring these breakthroughs to partner with leading China's cloud computing players such as Alibaba. Huang articulated:
We will engage with cloud service providers in China in the same way that we do in the West. In the West, we launched a number of cloud services in which we collaborated with CSPs to deploy the Nvidia DGX AI supercomputer in their cloud. Ampere and Hopper will be available in China, as previously reported. The processors will strictly adhere to all export regulations and laws. They will be used by Chinese cloud companies. Alibaba, Tencent ( OTCPK:TCEHY ), and Baidu ( BIDU ) are all excellent partners, and I am confident that they will have the most powerful AI computer systems accessible. - DIGITIMES
As such, we urge investors to watch these developments closely for Alibaba Cloud. We previously highlighted why Alibaba would focus on its cloud division to lead the charge.
Hence, we believe Alibaba's massive scale advantage should undergird its ambitions to leverage the generative AI space to strengthen its leadership against its peers.
BABA price chart (weekly) (TradingView)
Last week, we noted a significant price action development, as BABA formed a bear trap or false downside breakdown.
As such, buyers returned in force to defend against further selling downside and robustly finished last week's action.
BABA blended fair value estimates (InvestingPro)
In addition, BABA's valuation also seems highly attractive now, even if we account for a considerable margin of safety.
Hence, the price action and attractive valuation are consistent with improving forward fundamentals.
Of course, there is still a high level of uncertainty. However, if you wait for all the stars to align, we believe BABA would not likely trade at such a steep discount.
We believe the buy point seems attractive now if you have high conviction over its wide-moat, significant scale, profitable business model, and Jack Ma's encouraging return.
Rating: Strong Buy (Revised from Buy).
Important Note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
For further details see:
Alibaba: Jack Ma's Return Should Bolster Investors' Sentiments