Alibaba (NYSE:BABA), the Chinese tech giant, disappointed investors in 2023 while many of its American counterparts delivered strong returns. Alibaba stock is down nearly 40% in the last 12 months, but new catalysts have emerged to push the stock higher in 2024. Although regulatory risks must be carefully monitored, I am bullish on Alibaba stock.
SoftBank Finally Completes Divestment of Alibaba
SoftBank (OTC:SFTBF), the Japanese investment firm led by billionaire Masayoshi Son, was one of the first institutional investors to believe in Alibaba. The investment firm invested $20 million in Alibaba in 2000. In late 2021, SoftBank entered into a forward contract with its subsidiary Skybridge to divest its Alibaba stake. This contract allowed SoftBank to buy back Alibaba shares from Skybridge if necessary.
On January 25, SoftBank announced the settlement of these prepaid forward contracts with Skybridge, reportedly reserving a profit of approximately $8.5 billion from its investment in Alibaba. The investment firm has decided not to buy or sell new shares of Alibaba in the foreseeable future. The company currently owns a minor stake in Alibaba of about 0.5%, as opposed to an ownership stake of 32% back in 2021.
From a technical perspective, the massive selling pressure created by SoftBank over the past two years has acted as a barrier to Alibaba shares trending higher despite the company spending massive amounts on share buybacks. For reference, the company spent $10.2 billion on share buybacks in the last 12 months.
Going forward, it seems reasonable to assume that buybacks will ultimately create a positive impact, assuming the company continues to perform well financially.
The Founder and Chairman Bets on Alibaba
On January 23, SEC filings revealed that Alibaba founder Jack Ma and current Chairman Joe Tsai both bought shares in the company, indicating their improved sentiment about the company’s prospects at a time when SoftBank is exiting its investment. Mr. Ma bought $50 million worth of Alibaba shares, while Mr. Tsai invested $151 million in the company through his family investment fund.
Following these transactions, Jack Ma and Joe Tsai became the company’s two largest shareholders, ending SoftBank’s dominance that lasted several years. The return of the founding members as largest shareholders is likely to boost investor sentiment in the coming months, which was evident from the initial market reaction on January 23, when Alibaba stock jumped more than 7% following the release of SEC filings highlighting these transactions.
Alibaba Enjoys a Long Start to Grow
Alibaba’s investment appeal stems from two factors: the long growth runway enjoyed by the company and its cheap valuation.
Alibaba has emerged as a leader in the cloud computing space in China, which is a market that is expected to grow exponentially in the next few years, with companies of all scales and sizes moving to the cloud. According to Canalys data, Alibaba Cloud accounted for 34% of the cloud market in China at the end of Q1 2023, with Huawei Cloud in second place with a market share of 20%.
According to extra, revenue in the Chinese public cloud sector will grow at a CAGR of 18.7% until 2028, resulting in a market value of $137 billion at the end of the forecast period. The continued integration of AI capabilities in the cloud market will be one of the key growth drivers in the next five years.
Alibaba enjoys considerable pricing power in this market segment, and the company has reported consistently higher renewal rates compared to many of its peers. These observations suggest that Alibaba is well positioned to take advantage of the expected growth in the cloud market.
The company integrates AI into its digital retail technologies, including the development of a unified core technology and solves language translation challenges. In the digital media entertainment segment, the company uses AI to create next-generation content and achieve process-based digitized film and television programs.
While a full business separation may no longer be in the cards, Alibaba continues to find ways to manage its business units independently, which should enable the company to unlock hidden value in the coming years. This will be another growth engine.
At a more granular level, the company has come up with ambitious visions for each of its key business segments. Examples include 1688 aiming to utilize products made in China with business customers in mind, Xianyu seeking to become a lifestyle platform without limiting itself to second-hand goods, DingTalk aiming to become the best AI intelligent assistance system in China, Quark targeting students to sell their knowledge. products, and Youku committing to prioritize self-produced content to compete in the video content niche.
Is Alibaba Stock a Buy, According to Wall Street Analysts?
Based on the ratings of 20 Wall Street analysts, BABA stock comes in as a Strong Buy. Alibaba’s average share price is $118.20, which implies an upside potential of 63.4% from the current market price.
Alibaba trades at a significant discount to its historical valuation multiples and also compared to its US counterparts. The company is valued at a forward P/E of 8.2 compared to its five-year average forward P/E of 18.15. To add more context, Amazon (NASDAQ:AMZN) trades at a forward P/E of 59.4.
Alibaba’s cheap valuation has attracted many Wall Street bulls in recent months, but its shares have fallen short of expectations due to investor concerns about Chinese regulators and other macroeconomic factors.
The Takeaway: Alibaba Stock Is Closer to Turning a Corner
Alibaba has remained cheaply valued for about two years. Today, new catalysts emerged to push the stock higher in the form of SoftBank completing its planned divestment of Alibaba shares and the improving regulatory improvement. The company appears attractively valued for long-term investors at a time when the tables are turning in the company’s favor from both regulatory and financial performance.
Disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.