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Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

Alibaba Group Holding  / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> reported underwhelming June quarter results (FY22Q1), even if we account for the unfavorable comps against the COVID boosted June 2020 quarter.  With the regulatory share overhang continuing to linger, is this the right time to press the stop-loss button? Four reasons why I am staying constructive: <ol>
<li>
Downside support with cheap valuations: BABA trades at 16.5x FY23 consensus earnings on 23% earnings growth in FY23 (consensus estimates are likely to decline).  (Figure 1) The stock's operating profit grew 25% per year for the last two fiscal years (despite the flat operating profit growth in FY21) (Figure 2.)</li>
<li>
Revenue growth was soft but for a good reason. Revenue growth in the June quarter looked weak because of the unfavorable comparison to the COVID boosted quarter and because BABA is in a transitional stage.  From 2014 to late 2015, BABA's share price fell close to 40%, only to fully recover in the following 12 months as revenue growth accelerated from new ad load and increase in customer demand.  (See Figure 3.)  In my view, short-term investors will miss out on the upside once the new revenue engines rev up.  </li>
<li>
Earnings margins were compressed due to investments in growth but the core earnings remain strong. Earnings growth fell because of the company's investments in strategic businesses.  While these investments still recorded losses, they generated 48% of the company's revenue growth.  Profits will follow, but not in 2021. Keep in mind that the Marketplace EBITA margin has rebounded to 73% from 70% in the March quarter. </li>
</ol>

Alibaba Group (BABA US) reported underwhelming June quarter results (FY22Q1), even if we account for the unfavorable comps against the COVID boosted June 2020 quarter.  With the regulatory share overhang continuing to linger, is this the right time to press the stop-loss button? Four reasons why I am staying constructive: 

Downside support with cheap valuations: BABA trades at 16.5x FY23 consensus earnings on 23% earnings growth in FY23 (consensus estimates are likely to decline).  (Figure 1) The stock's operating profit grew 25% per year for the last two fiscal years (despite the flat operating profit growth in FY21) (Figure 2.)

Revenue growth was soft but for a good reason. Revenue growth in the June quarter looked weak because of the unfavorable comparison to the COVID boosted quarter and because BABA is in a transitional stage.  From 2014 to late 2015, BABA's share price fell close to 40%, only to fully recover in the following 12 months as revenue growth accelerated from new ad load and increase in customer demand.  (See Figure 3.)  In my view, short-term investors will miss out on the upside once the new revenue engines rev up.  

Earnings margins were compressed due to investments in growth but the core earnings remain strong. Earnings growth fell because of the company's investments in strategic businesses.  While these investments still recorded losses, they generated 48% of the company's revenue growth.  Profits will follow, but not in 2021. Keep in mind that the Marketplace EBITA margin has rebounded to 73% from 70% in the March quarter. 


Alibaba (BABA US): Why I Remain Constructive