Analysts Say Alibaba's Lackluster Share Price Could Double In Face Of Company's Rising Earnings And Deal Driven Strategy

After a long hiatus in the dumps, Alibaba Group Holding Limited BABA is coming back in view of some investors’ radars on the back of recent earnings announcements anddeals to further fortify its balance sheet.

While the company remains over 50% below its 5 year-ago valuation, with a P/E ratio in the teens and strong cashflow position, now may be the time to pick up the previously beleaguered shares, say analysts.

In August, Alibaba announced that its revenue was up 14% in the quarter ended June 30, to 234.16 billion RMB ($32 billion) while net income was 51% higher in the same period, rising to 34.33 billion RMB.

That gives the company a net margin of 14.6%, significantly higher than its US rival Amazon.com, Inc. AMZN (5.02%) and more in line with China tech stock market darlings Baidu, Inc. BIDU and Tencent Holdings Ltd TCTZF.  

“The results, in our view, demonstrated BAB’s early-stage success in Taobao and Tmall business transformation to focus on quality user growth and better user retention through product supply and merchants ROI enhancement,” wrote Saiye He, a tech research analyst at Chinese bank CMB International in an August note.

CMB put a price target of $156.60 on Alibaba’s stock, nearly double the current value of the shares. The target echoed another improvement by Nomura in January, which raised its price target for Alibaba’s shares to $138 from $110 previously.

At 19x earnings, Alibaba trades at a fraction of the price as does Amazon and other AI giants with which it is increasingly competing such as Nvidia Corporation NVDA, despite showing a similar profit margin to the latter.

This premium may go higher if Alibaba’s proposed radical restructuring gets underway under the company’s new CEO Eddie Wu, who took the helm in June this year. Wu intends to divest Alibaba’s subsidiaries to unlock the company’s cash and beef up its investment in tech.

In the past week, Alibaba announced that it is selling 50% of its shares in its logistics subsidiary Cainiao Smart Logistics Network Limited in a $1 billion IPO on the Hong Kong Stock Exchange.

There are five other five business units Alibaba said in March that it would spin off. These are its cloud subsidiary, Taobao.com – which is China’s largest online shopping mall, its e-commerce division, its local services group and its sprawling digital media and entertainment group. Together, sales of each of these subsidiaries could represent billions in additional cash for Alibaba which, if invested in high-margin technology could elicit a big pure play valuation for its shares, Macquarie Capital’s Ellie Jiang told CNBC last month.

Naturally, investing in Alibaba's shares is not without its risks. Chinese consumption remains weaker-than-hoped-for after being hit hard in the Covid-19 pandemic.

Furthermore, any deal-making activity that Alibaba intends to pursue will also be contingent on market strength in Hong Kong going forward, which is far from guaranteed. Year-to-date, Hang Seng Index is 20% lower after being hit hard by rising defaults of property developers on the mainland. China's property market in particular, where the bulk of Chinese savings are invested, may dampen the outlook for consumer-driven tech stocks like Aliaba.

Still, Jiang brushed aside these concerns, citing the attractiveness of the company's financial position and its valuation vs. that of its competitors.

“It’s all about catching up the growth against the industry,” Jiang said. “We anticipate that all of Alibaba’s business units will be able to provide that growth into the next few quarters.”

Alibaba’s e-commerce division is widely seen as the next potential spin-off. In its Q1 earnings report, Alibaba said the unit had 17.14 billion RMB ($2.35 billion) of revenue, up 60% of the previous quarter year-on-year. A sale of that division could net the company a sizeable amount of cash, she said.

Other analysts concur. Bluesea Research strategists points out that Alibaba’s forward earnings multiple is just under 10x, which makes it one of the few potential bargains in the tech space right now.

“This is a massive discount to other stocks like Apple which are trading at close to 30 times their forward PE multiple,” the analysts wrote in a note. “If Alibaba is able to show further margin improvement, we could see a strong bullish momentum build for the stock.”

Disclosure: Author holds no stocks mentioned in this story.