Robert Way
Alibaba (NYSE:BABA) and its share price have been in a whirlwind environment as Chinese regulatory authorities began cracking down on technology companies and potential growth disruptors emerged. About a year later, there have been signs that this crackdown is easing as regulatory agencies took a step back and are now focusing on companies who are violating specific business practices, which Alibaba, for the most part, does not partake in.
However, after the company’s share price stabilized, US regulatory authorities began evaluating Chinese owned companies which were listed in the United States on US-based exchanges for possible delisting. This sent the company’s share price back down towards the levels it was at during the Chinese crackdown. As no material changes to its structure or its growth prospects took place over the course of this event, I continue to believe in the company’s resiliency and that current valuations present a unique investment opportunity for folks who are patient and can wait through a lot of high-profile noise which is nearly certain to emerge as the world’s two economic superpowers collide.
Overall, there are certainly risks associated with this investment and any investment in a company which is under scrutiny and potential delisting, but for me – the reward is easily worth the risk at this point in time.
Here are the reasons why.
Revenue Growth Is Steady
Alibaba has so many revenue streams and programs that it would take several articles to go through them all, as their 650 page 20-F (foreign company version of 10K) shows. But there are several revenue streams of theirs which I believe constitute an outsized portion of their growth prospects. Let’s zero in.
The first one is their cloud business. While cloud computing is continuing to replace a significant portion of the worlds standard IT infrastructure, the company is focused on not only maximizing their cloud business in the People’s Republic of China but also looking at international markets, particularly in Eastern Asia and the Asia-Pacific region as a whole, to continue and grow this business. Getting in the door early in a lot of these other countries, before they fully become a developed nation status and garner outside investments, is key to maintaining a long term presence.
The company also has another advantage, similar to Amazon (AMZN) in the United States – their cloud margins are so large that they use those profits to subsidize other expansion opportunities like their retail and commerce business expansion. Another plus is that since their margins are so large after all the infrastructure investment they put in, they have a much lower potential price point than other competitors in the Asia-Pacific region and can win cloud contracts which will aid their overall expansion efforts.
The second part is the retail and commerce business. I realize that these 2 business segments amount to a majority of their revenues, but they also amount to the largest portion of their expansion potential. Allowing merchants in other Asia-Pacific region nations to seamlessly sell their products and run their small businesses across the region and the world is a huge plus and as these nations become more and more of economic powerhouses, the company is set to reap the benefits of these early investments.
The company has been investing in deploying resources and building infrastructure in other regions across the world, as well as partnering with local tech and retail companies to provide their services. This, I believe, will be a big part of enabling their continued high-pace growth, even as they’ve begun to saturate in the People’s Republic of China with their commerce platform.
What It Means For 2030(ish)
Alibaba Group, according to analyst estimates aggregated by Seeking Alpha, is projected to report revenues which are higher by about 63% by 2028, rising from $134 billion, the projected figure for this upcoming year, to just shy of $218 billion.
This represents a CAGR (compound annual growth rate) of 10.2% over the next 5 years when it comes to the company’s revenues. Translating that to earnings shows how the company’s investment are going to pay off, while they continue to work on expanding their per-user revenues which drives profits.
Over the same time period, the company is projected to report a 94% bump in EPS, rising from a projected $7.34 in the upcoming fiscal year to $14.29 in 2028. This represent a CAGR of 14.2% over the next 5 years.
There are a few reasons for this, with the most important one being margin expansion.
Margins Expected To Increase
Even though the company has already admitted that their user base, comprised of over 1 billion monthly average users in the People’s Republic of China, is relatively saturated – they’re working on expanding the per-wallet revenue, which translated to higher profits as costs for those users are already accounted for in most scenarios across their commerce platforms.
These are two of the main reasons I believe the company is set to outperform these expectations – I don’t believe that analysts consensus, linked earlier, fully account for the company’s international expansion efforts and that an increased revenue base may mean that short term margins will contract – the longer term margins are set to outperform as revenues increase and thus long term growth is set to outperform.
This means that a company which is currently expected to report higher margins, as evident by the higher CAGR in earnings vs revenues, is expected to, I believe, report faster growing earnings per share figures starting 2 to 3 years from now due to their international expansion efforts. This means that they are highly likely to outperform the historical annual market performance of roughly 10%. There’s also another benefit I believe other companies with higher debt loads are going to begin to face which Alibaba will not.
Interest Expense Control
As interest rates continue to rise all around the world, Alibaba is using their cash pile to control the increase of debt and refinance their existing debt to lower overall interest expense. Even though the company’s overall debt payments and interest expense are almost negligible relative to their income, the focus on this now can potentially save them several billions of dollars a year over the next decade, which can be used to increase shareholder value and help them compete for new users in new international markets.
After peaking in 2018 with the company paying $612 million a year in interest expense, they’ve seen a steady reduction every year since and now pay $504 million a year in interest expense.
From 2020 to 2021, the company took on a nice new chunk of debt, rising from just shy of $17 billion to about $20.7 billion. Since then, it has remained relatively steady as they currently have about $20.6 billion in long term debt. They’ve refinanced some of that debt and worked to raise money in more friendly means to avoid the rising interest rate environment.
As the company has a significant cash pile, I believe they can continue and work to reduce their debt pile to help with valuation, but given the low overall interest rate they pay, it’s not as much of a priority, as long as it doesn’t substantially increase.
Valuation vs Expectations
Currently, the company is trading at about 7x to 12x forward earnings, depending on how far out you go. Given that I believe that international expansion may keep margins at currently projected levels, I am opting to look at revenue multiples for the next 5 years to find an adequate valuation.
Comparing the company to Amazon is the most obvious choice given the similarity of their business structures and segments. Amazon is currently trading at about 2.8x forward sales for the upcoming year and 1.5x forward sales for 2028 projected sales. The companies have more or less a similar revenue growth rate projection but Alibaba is trading at a significantly lower multiple.
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | |
| Alibaba | +5.9% | +13.6% | +11.5% | +10.7% | +7.2% | +8.4% |
| 1.8x | 1.6x | 1.4x | 1.3x | 1.2x | 1.1x | |
| Amazon | +11.2% | +15.4% | +14.6% | +12.3% | +13.4% | +12.7% |
| 2.8x | 2.4x | 2.1x | 1.9x | 1.7x | 1.5x |
(Source: Seeking Alpha Aggregate – Analyst Projections – BABA & AMZN)
An easier way to look at it is the percentage of Alibaba’s growth relative to Amazon’s, which although it shows that certain years may be comparable, most are not and thus Alibaba, under current projections, should be trading higher.
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | |
| Growth | 52.7% | 88.3% | 78.8% | 89.0% | 53.7% | 66.1% |
| Multiple | 64.3% | 66.7% | 66.7% | 68.4% | 70.6% | 73.3% |
Conclusion – Cheap & Valuable
Given that the aforementioned comparison to Amazon concludes that under their current projections, Alibaba is set to spend the upcoming year slightly overvalued relative to Amazon, it will spend the following 3 at a significantly lower one. This is before my expected outperformance when it comes to international expansion efforts alongside their margin expansion from working to increase their per-user revenue streams.
The later out projections are still there, but that’s where I expect Alibaba to do their best once their international margins expand towards their domestic ones. I believe that by 2028, the company will be outperforming their current revenue expectations by about 20% and current earnings per share expectations by about 15%, representing a potential 13% annual rise in revenues and 16% rise in EPS over the following 5 years of the company’s growth plan.
This, I believe, will easily outperform the broader market and offer investors a decent exposure to several fast growing markets in a region of the world which is becoming increasingly difficult to get without restrictions.
This investment does not come without risks, especially of delisting, but other excellent Seeking Alpha contributors have dissected the prospects of delisting and I won’t bore you with repeating them here for the 10th time.
I remain highly bullish on Alibaba and have been and will continue to, add to my position over the course of the next few weeks if the share price remains where it is now.
Be the first to comment