Alibaba Group Holding Co., Ltd (New York Stock Exchange: Alibaba) announced its latest quarterly earnings results on Thursday morning. The company easily beat estimates and showed a significant improvement in profitability. Factor in this basic progression and its core Low valuation, Alibaba Group shares still look attractive, I think.
Alibaba Group announced its latest results for the fiscal fourth quarter and full year 2023 on Thursday. Address numbers can be seen here:
Alibaba’s revenue came in marginally above $30 billion, up slightly from the previous year’s quarter, which was better than expected. At the same time, the company posted earnings per share of $1.56 (based on ADR), which was much stronger than what analysts had expected, beating the consensus estimate by about 15%.
despite of Underperforming and massively outperforming earnings estimates, Alibaba shares didn’t move meaningfully after the earnings release. In pre-market trading, the shares were mostly flat.
Alibaba’s profitability is improving rapidly
While business growth has been greatly appreciated during the pandemic, when money was very cheap and when many investors were chasing growth without looking at valuations, things have changed over the past year. Tightening financial markets and a sharp increase in interest rates have made investors less hungry for growth and more focused on valuations and fundamental profitability. While the growth of Alibaba’s business is not as strong as it has been at times in the past, its profitability is improving rapidly.
During the fourth quarter, Alibaba Group saw its EBITDA rise by 60% year over year. Note that depreciation expenses are included here, unlike the EBITDA measure. Alibaba management also notes that adjusted EBITDA, where depreciation expenses are subsidized, rose 37% year-over-year, to $4.7 billion.
Like many other major technology companies, including such US-based companies as Alphabet (GOOG, GOOGL), Amazon.com, Inc. (AMZN), etc. Alibaba Group has felt some profitability headwinds in the recent past. Overstaffing, overcompensating engineers, etc. has pressured margins. But while the big US tech companies are just turning around, Alibaba has been making great progress for two quarters already, and its results in the fourth quarter were much stronger than those of the previous year.
Alibaba’s adjusted net profit rose an attractive 38% year-over-year, jumping to $4.0 billion, or $16 billion annually. For a company valued at $230 billion, that’s a pretty solid result. However, the story gets better when we factor in the fact that Alibaba’s fourth fiscal quarter was a seasonally weaker quarter. Over the past four quarters, i.e. during Alibaba’s 2023 fiscal year, the company generated an adjusted net profit of $21 billion. This makes the earnings multiple of about 11. Alibaba’s net profit during the fiscal year increased by 4% over the previous year. Thus the growth rate was stronger during the last quarter, which indicates that the momentum is on BABA’s side. If this trend remains the same, Alibaba could generate much higher profits this year, all else being equal.
On a share basis, Alibaba has earned $7.94 over the past 12 months, which is up 4% year over year — in line with the company-wide net profit growth rate. This was a somewhat disappointing result, given that Alibaba is currently authorized to buy back $25 billion worth of its shares, or more than 10%. At least so far, Alibaba’s buybacks haven’t significantly reduced the number of shares, so all they’re doing is offsetting the dilution by issuing shares to employees and management. While compensatory dilution is also a good thing and helps prevent a share count from rising, investors generally want to see a clear decline in a company’s share count when a large buyback program is in place. At least so far, it has not happened in Alibaba.
During the most recent quarter, Alibaba Group spent $1.9 billion on share buybacks, which equates to $7 billion to $8 billion annually. The vast majority of the current repurchase authorization — $19.4 billion — is still valid and available for repurchases in the next two years.
Since Alibaba generates about $25 billion in free cash annually (fiscal year result 2023), Alibaba can easily increase the pace of buybacks from the current level. On top of that, the company also has a large amount of dry powder that can be used to fund future stock buybacks. At the end of the fourth quarter, Alibaba Group’s cash and cash equivalents totaled $82 billion. Not only does that cover multiple times the current repurchase authorization, but it’s also worth 35% of Alibaba’s current market capitalization, making BABA’s monetary position one of the largest in relative terms in the broad tech industry. For example, the famous cash position of Apple Inc. (AAPL) is only in the 10% range relative to the company’s market capitalization.
Overall assessment and skepticism
Alibaba’s revenue growth is not very clear, but it is likely attributed to the fact that the company is prioritizing profitability at the moment. When a company spends less on acquiring new customers, revenue growth slows, but margins can expand, for example. In the current environment, where investors are becoming less hungry for growth and want to see strong and resilient earnings, this seems like a good strategic move, I think.
Based on its subsequent results, Alibaba Group is fairly inexpensive — shares trade at about 11 times net earnings, making for a dividend yield of around 9%. Looking at free cash flow, the numbers look even better, with 9 times free cash flow providing a free cash flow yield of 11%.
In order to calculate Alibaba’s cash position, we can also look at the enterprise value of the EBITDA multiple, which is also quite low:
With a 7x EBITDA multiple, Alibaba looks pretty cheap, both in absolute terms and compared to how other big tech companies are valued. Meta Platforms, Inc. is trading. (META) is at a single-digit multiple of EBITDA as well, but it’s about 30% more expensive. Alphabet, Amazon and Apple are much more expensive.
Of course, the overall situation for Alibaba is different relative to its US peers, which warrants at least some valuation discount — though I don’t think the discount should be as big as it is. With the Taiwan dispute looming and other macro risks related to China, Alibaba could be adversely affected should the macro situation worsen. However, at least some US companies will be hit hard by the escalating Taiwan conflict as well, such as Apple, which relies on China for manufacturing and as an end market — but Apple shares are not subject to a total risk deduction at all. The same can be said of Tesla, Inc. (TSLA), which is also heavily dependent on China, and which is still trading at a very high valuation. Apparently, the market believes that the macro risks related to China should be factored into the share price of BABA, but not in the share price of other companies that will be hit hard by the same macro risks.
With the planned split of the company, the foreseeable future will be eventful for the shareholders of Alibaba Group Holdings Limited. It remains to be seen how this will ultimately play out, but overall, I like the idea of splitting up the different companies in order to unlock hidden value. I think the sum of the parts is worth much more than the $230 billion that Alibaba is trading in at the moment.
While the upcoming split and the news surrounding it will likely be important for Alibaba Group Holding Limited’s share price, it’s good to see that the company is also doing well operationally. Fourth quarter results were strong on an earnings basis, and the company also had higher-than-expected sales.
However, the buybacks were somewhat disappointing, as the number of shares of Alibaba Group Holding Limited did not really shrink, and since BABA spent much less on the buybacks than it could have, given the huge cash flow and huge cash stock .
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