Chinese e-commerce behemoth Alibaba (NYSE:BABA) demonstrated robust momentum following its Q1-2024 results. It reached the $90 level that hadn’t been reached since last year before eventually pulling back closer to $80. The company’s performance has remained steady across its diverse range of businesses, with specific segments experiencing outstanding growth while others have shown more modest progress.
Additionally, Alibaba has repurchased shares and announced dividends, and its stock continues to trade at a valuation well below the industry average and its peers. This comes at a time when Wall Street’s sentiment toward Alibaba seems to be turning more bullish.
Throughout this article, I will delve into the details to understand the performance of Alibaba’s segments, where the company is experiencing growth, and its strategies to reaccelerate growth in underperforming segments. Despite the recent rally, I believe Alibaba is still undervalued, considering the potential of its diverse business. Therefore, I maintain a bullish stance on the stock.
Alibaba’s Taobao and Tmall Group: Just Right
One of Alibaba’s most important segments is the Taobao and Tmall group, which was responsible for nearly 40% of the company’s total revenue in the recent quarter, as you can see below.
These platforms serve as Alibaba’s primary e-commerce channel, connecting millions of buyers and sellers across China. Taobao, known for its vast selection of consumer goods and competitive pricing, caters to individual consumers, while Tmall focuses on brand-name products and provides a premium shopping experience.
Under this segment, Alibaba has increased its strategic investment in price-competitive products and customer service. They also enhance membership program benefits and technology to improve the user experience. These efforts have improved consumer retention and purchase frequency in the quarter.
Alibaba focuses on several areas in this critical segment, and the initial results indicate that its strategy is working. It’s reassuring to hear this, as sometimes management’s decisions to invest in specific customer experiences don’t yield positive results.
When that happens, management must explain to investors, often citing macroeconomic environments or interest rates as factors. However, in this case, Alibaba’s investments have paid off.
Taobao and Tmall revenues grew 4% year-over-year, which I believe is satisfactory. In Q1, Alibaba reported double-digit online GMV (gross merchandise value) and order growth year over year, driven by a substantial increase in purchasers and purchase frequency.
According to the company, this double-digit growth was achieved by acquiring new customers and increasing purchase frequency among existing customers. This is all great news, in my opinion.
Alibaba’s Cloud Intelligence Group Segment: Relatively Flat
The next segment I want to explore is Alibaba’s Cloud Intelligence group, which was the company’s second-best revenue generator in the last 12 months.
This group includes core public Cloud offerings such as elastic computing, databases, and AI products. It recorded double-digit year-over-year revenue growth, which is also excellent for the segment.
AI demand has been increasing exponentially, especially in the U.S., and is now starting to grow worldwide. Alibaba’s double-digit revenue growth, which is evident in the latest quarter, suggests that it will benefit from this growth trend.
However, the management team mentioned that the firm’s cost benefits from infrastructure scale and advanced technologies enabled it to reduce prices across more than 100 public cloud products in the quarter. Management’s goal is to enhance cost efficiency for their customers and boost public cloud adoption in China.
In April 2024, Alibaba extended these price reductions to their overseas public cloud offerings, further improving their competitiveness in the global market. In other words, they cut prices.
When a company cuts prices and its revenue grows, it’s less impressive to me than when it maintains or increases prices while still achieving revenue growth. This demonstrates genuine customer demand for the product rather than just responding to promotions or incentives.
However, there’s potential good news in the long term, as lower prices may make products more affordable and reach a broader customer base. Alibaba’s overall profitability is solid, with an operating profit margin approaching 10%. This means Alibaba has the flexibility to lower prices to gain market share and attract more customers, ultimately leading to increased profitability.
While this could potentially boost bottom-line growth, its impact remains uncertain. Nonetheless, achieving double-digit revenue growth while maintaining or increasing prices would be even more impressive.
Alibaba’s International Digital Commerce Group (AIDC) and Cainiao: Strong Growth
The next segment I want to highlight is Alibaba’s International Digital Commerce Group (AIDC). This segment saw revenue grow by 45% year over year, which is excellent news. This growth was primarily driven by the cross-border business, particularly the Choice business on AliExpress. Choice is a strategic initiative that integrates AliExpress’s infrastructure with Alibaba Group’s global logistics network to streamline product sourcing directly from merchants.
AliExpress’s price competitiveness and timely delivery are leading to increased customer adoption. As a result, Alibaba increased investments in its cross-border initiatives this quarter. AliExpress is gaining traction, as it offers reasonably low prices and decent shipping times.
Another highlight is the Cainiao smart logistics segment. Revenue from this segment grew 30% year-over-year, driven by revenue from cross-border fulfillment services that support AliExpress.
Interestingly, Alibaba tried to spin off this business and have an initial public offering on the Hong Kong Stock Exchange, but the company paused it. Alibaba said it would enable Cainiao to work more closely with AliExpress.
Share Repurchases, Dividends, and a Low Valuation
Alibaba recently repurchased $4.8 billion worth of shares as part of its repurchase plan, indicating that the company itself perceives its shares as undervalued. Additionally, Alibaba approved an extraordinary dividend, emphasizing its dedication to maximizing shareholder returns.
I believe that Alibaba trading at a forward P/E ratio of 10.7x compared to an industry average of 16x is still very attractive, especially considering a PEG ratio of 0.5x, based on the company’s EPS growth consensus estimate for the next 12 months.
Is BABA Stock a Buy, According to Analysts?
The analyst consensus toward Alibaba stock is overwhelmingly bullish, giving the stock a Strong Buy rating. The average Alibaba stock price target, based on projections from 17 Wall Street analysts over the last three months, stands at $103.46 for the next 12 months. This implies 26.65% upside potential.
The Takeaway
When we look at Alibaba’s segments more broadly, we see a balance between the leading and complementary segments. This balance resulted in yearly revenue growth of 7% in the last quarter, which still surpasses the broad-line retail industry — even though Alibaba is a much more complex business than that.
Various business segments are performing exceptionally well, such as its international digital commerce and Cainiao, while others are not performing as strongly. However, despite a sharp rise in shares over the past month, I believe Alibaba remains undervalued, and I continue to view it as a Buy.
