Alibaba Group Holding Limited (NYSE:BABA) is one of the largest e-commerce companies in the world and, at its peak, occupied more than 50% of the market share. However, as most value investors are probably already aware, the stock has fallen to bargain-basement levels in recent years due to a wide variety of setbacks, including a tech regulatory crackdown in China, the U.S. government passing legislation that poses a very real threat of de-listing Chinese stocks from U.S. exchanges, and last but not least, macroeconomic issues brought about by the Covid-19 pandemic and China’s ongoing Covid lockdowns.
At this point, investors have already had enough time to account for the first two of those risks, so at the moment it seems like the stock is still falling because of the macroeconomic issues. Investors and analysts alike are hoping for more positive news that could indicate a pending rebound.
Those hoping for an Alibaba turnaround may soon get their wish: recently, there have been indications from Chinese officials that certain strict policies could be eased, an indication almost certainly aimed at alleviating economic headwinds experienced over the last two years.
If the Chinese economy can begin to recover, it will doubtless provide a huge boost to Alibaba’s growth. The tech crackdown is mostly in the past, and the U.S. delisting would not actually have as much of an impact as investors fear. I believe an economic recovery could be the boost that Alibaba needs to finally break out of bear market territory.
The Chinese government offers respite to a battered market
Alibaba bulls finally have something to cheer about as the Chinese government mulls easing the Covid restrictions and increasing vaccination of the elderly population. One of the company’s major issues this year has been the unexpected Covid lockdowns that have caused logistics and sales problems.
One of the most recent hits that the company took owing to the country’s strict Zero Covid restrictions was on its 11.11 Global Shopping Festival. Due to Covid lockdowns, 15% of the country’s delivery areas were barred, disrupting the company’s ability to fulfill orders. The company didn’t share the total gross merchandise value and only said that sales were in line with last year during the same period.
After the first quarter’s disappointing financial results, the second quarter’s results brought a little relief to the investors. The revenue was $29.12 billion, up 3% over the year-ago period, and missed the analysts’ estimates by $490 million. The adjusted net income of $4.8 billion saw a 19% increase and beat the forecast by $0.17 per share. However, due to marking down the fair value of its investments thanks to the stock market crash, the company reported a net loss attributable to ordinary shareholders of 20.6 billion Chinese yuan ($2.92 billion), down from the net income of 5.4 billion reported in the same period in the prior year.
The buyback program will help perk up investor sentiment
Alibaba has given the go-ahead for another $15 billion in share buybacks, which will last until 2025. This is an addition to the company’s ongoing $25 billion share buyback program, under which it purchased $18 billion in shares through Nov. 16. If the e-commerce giant completes the program, it will have bought back 10% of its stock by 2025 based on a market capitalization of $213 billion.
The announcement of a share buyback program is an excellent way to show confidence and support investors when company shares are in trouble. Companies will often use their own money to purchase back their stock from shareholders when share prices have dropped to below their fair value, reducing the number of shares circulating and thus boosting prices.
A benefit beyond the financial appeal is that buybacks tend to be seen favorably by shareholders as a sign that the company believes the current share price does not accurately reflect true value. The incentive for companies to announce such programs helps improve investors’ trust and potentially avoid shareholder distrust. Therefore, Alibaba’s wise decision to take this action during times like these can be seen as beneficial for restoring investor confidence.
Diversification is a two-sided coin
Many analysts have lauded Alibaba for its diversification into technologies such as the Cloud. Using the profits from its e-commerce business, Alibaba has developed China’s leading Cloud business as well as other technology ventures. However, diversification into the tech sector is a two-sided coin, and this has become apparent as the tech sector selloff has likely also eaten into Alibaba’s share price.
The company’s main source of e-commerce revenue is China, and due to its high saturation in this struggling market, the annual active consumers and gross merchandise value increased by only 2% in the first three months of 2022. Moreover, customer management revenue decreased by 7% in the latest quarter.
Meanwhile, the Innovation Initiatives and Others segment saw sales go down by 45% year over year. Local consumer services had the biggest negative impact on the adjusted Ebitda, with a loss of 3.5 billion.
The company is trying to expand its operations by entering new sectors but hasn’t had much success so far. Investing in technology will likey have an adverse effect on the company’s bottom-line in the near-term and could contribute to negative investor sentiment, which is a danger to watch out for.
Despite headwinds, I believe Alibaba is undervalued at the current bargain-basement prices, even if it may take a while for the stock to recover.
Since its founding in 1999, no other company has been able to take its place or match its success in the Chinese e-commerce market. The company faces fierce competition, and the ongoing trade dispute between China and the U.S. is a a major hindrance, but these challenges only emphasize Alibaba’s lasting strength. Even with recent consumer sentiment shifts due to economic turbulence, there is still quality and potential within Alibaba stock.
This article first appeared on GuruFocus.
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