The biggest Chinese cloud infrastructure and e-commerce business, Alibaba, went public in September 2014. Its stock price increased 38% on the first trading day, giving it a $231 billion market valuation.
Alibaba's share price reached a record high of $319 in October last year, and its market valuation was close to $850 billion. At the time, Alibaba seemed poised to become the first Chinese internet firm to reach the trillion-dollar mark.
However, after reaching that peak, Alibaba's stock price plummeted, bringing its worth down to approximately $460 billion. See why Alibaba's stock fell and if it will recover to reach the $1 trillion milestones by 2025.
How did Alibaba fare?
When China's State Administration for Market Regulation opened an antitrust investigation into Alibaba's e-commerce operation in December last year, the company's sharp drop began. Alibaba was ultimately fined 18.23 billion yuan ($2.82 billion), and its e-commerce division was compelled to renegotiate its pricing policies and end its exclusive agreements with merchants.
In the fourth quarter of that year, Alibaba paid the record fine, equaling 12% of its net profits for the previous fiscal year. Smaller penalties for unauthorized investments and acquisitions were also levied on Alibaba.
To make things worse, the Chinese authorities put the IPO of Ant Group on hold in November of last year after Jack Ma, the founder of Ant and the former CEO of Alibaba, criticized the nation's banking system. Ant's IPO offered opportunities for profit for Alibaba, which controls a third of the company and utilizes its Alipay platform to help clients conduct online transactions.
A new U.S. regulation that might delist shares of Chinese businesses that don't adhere to stricter auditing standards over the next three years and China's escalating crackdown on its top digital firms drove even more investors to avoid Alibaba.
Alibaba's revenue shortfall in the first quarter of 2022, followed by an abrupt decision to invest 100 billion yuan ($15.5 billion) over the next five years into China's "common prosperity" initiatives to increase social equality, raised more concerns about its development and reliance on the Chinese government.
Can Alibaba still reach $1 trillion in revenue?
Despite significant losses over the last year, Alibaba's main businesses are still expanding. Alibaba's sales jumped by 41% to 717.3 billion yuan ($109.5 billion) in its most recent fiscal year, which ended in March. Meanwhile, its adjusted net income, which does not include the antitrust penalties, increased by 30% to 172 billion yuan ($26.3 billion). Its cloud computing revenue surged by 50%, while its core commerce revenue jumped by 42%.
As a result of increased reliance on its lower-margin retail businesses (such as its brick-and-mortar stores, direct sales channels, international marketplaces, and Cainiao logistics subsidiary) and new investments, analysts predict that Alibaba's revenue will increase by 29% this year but that its adjusted EPS will fall by 26%.
Considering that Alibaba is unlikely to encounter any further regulatory obstacles, analysts anticipate that the company's sales and adjusted EPS will increase by 21% and 15% in 2013.
According to their projections, the stock price of Alibaba is 20 times this year's profits and three times this year's sales.
Amazon trades at 65 times this year's profits and four times this year's revenues, expanding at a comparable pace as Alibaba. Therefore, it is evident that Alibaba's valuations are negatively impacted by regulatory issues and the market's dislike of Chinese equities.
Alibaba could produce 1.61 trillion yuan ($248.9 billion) in revenue and 78.89 yuan ($12.22) in earnings per share in fiscal 2025; however, if it meets analysts' expectations over the following two years and then continues to grow its revenue and earnings per share at a 20 percent rate for an additional two years.
By 2025, if its price-to-sales ratio doesn't change, it might be valued at nearly $750 billion. However, if the legislative obstacles disappear and Alibaba can demand greater values again, its market worth may surpass $1 trillion by 2025.
Before discussing where Alibaba will be and the value of its shares in 2025, I evaluate BABA's Q3 FY 2022 (YE March 31) financial statistics with an emphasis on certain measures.
The three significant financial and operational measures included in Alibaba's most recent quarterly earnings report need more discussion.
First, according to the company's Q3 FY 2022 results presentation, BABA's customer management revenue for the company's core China commerce business decreased by -1 percent YoY to RMB100.1 billion.
Alibaba's customer management revenue growth significantly decreased from +14 percent YoY in Q1 FY 2022 to +3 percent YoY for Q2 FY 2022, as I previously noted in my December 3, 2021 report. In other words, recent quarters have shown a decline in the financial performance of Alibaba's main China commerce sector.
BABA said that "slowing market circumstances and competitiveness in the China e-commerce sector" and "increasing merchant assistance" were to blame for the decline in its China commerce business' customer management revenue during its Q3 FY 2022 investor conference on February 24, 2022. The reduction in Q2 FY 2022 customer revenue increase on a YoY basis was due to the same factors.
The picture for Alibaba's China commerce business in the short term is still unclear. At its most recent quarterly results conference, Alibaba conceded that it is impossible to predict whether the country's consumer demand would revive in a "V-shaped or a U-shaped fashion."
Second, in the third quarter of fiscal 2022, Alibaba's cloud business sector only had a "very moderate" +20 percent YoY revenue rise. Contrarily, in Q2 FY 2022, revenue for BABA's cloud business division increased by a considerably quicker +33 percent YoY. This suggests that the revenue for the cloud category fell by -2 percent QoQ during the most recent quarter.
Alibaba did explain that if the impacts of "a top cloud customer's decision to quit utilizing our foreign cloud services for its international business due to non-product-related needs" were accounted for, the revenue growth of its cloud business would have been greater +29 percent YoY. ByteDance, widely known for its short-form video platform TikTok, is likely this customer.
BABA also said that "slowing demand from clients in the Internet sector, such as online entertainment and education," had an impact on its cloud business. In other words, since China's government recently passed new rules to tighten its control over the entertainment and tutoring sectors, the cloud part of Alibaba suffered due to legislative challenges for both industries. As revealed during its most recent earnings call, it didn't help that Alibaba faces concerns associated with sector concentration, with slightly less than half of its cloud business's customers working in the internet sector.
Thirdly, according to Alibaba's quarterly results presentation, its yearly active consumers for its China commerce business increased by +13% YoY and +2% QoQ to 882 million. By the end of the fourth quarter of fiscal 2022, BABA will have achieved its goal of one billion yearly active customers.
The growth in the company's China commerce business annual active customers in the most recent quarter is clear evidence that Alibaba's significant efforts to "expand aggressively in the grocery product category and the lower-tier Chinese cities" have been successful, as I noted in my early-December 2021 article.
In conclusion, Alibaba's third fiscal quarter of 2022 saw mixed results. In the most recent quarter, BABA's cloud business top line and customer management revenue both had poor growth. On the other hand, the fact that Alibaba has maintained its success in gaining new consumers in China is positive.
What Will The Price Of Alibaba Stock Be In 2025?
According to sell-side consensus projections obtained from S&P Capital IQ, the market expects Alibaba to increase its top line at a CAGR of 13.5 percent, from RMB859 billion (forecasted) in fiscal 2022 to RMB1,257 billion in FY 2025. In the next years, BABA's normalized net profit margin is anticipated to remain comparatively constant, ranging between 16.1% and 16.7 percent between FY 2022 and FY 2025.
Alibaba's projected revenue increase seems to be extremely doable. It is plausible to predict that Alibaba would have a considerably more modest pace of top-line increase, given the slowing in the development of its main China commerce industry, as mentioned in the previous section. BABA's revenue CAGR for the FY 2017–2021 period was +46 percent.
On the other hand, by raising the Average Revenue Per User (ARPU) for the China commerce sector and expanding the client base for its cloud segment, Alibaba can still provide a low-to-mid teens revenue increase in the medium to long term.
Alibaba stressed that it would "concentrate on transition from new user acquisition to user retention and ARPU growth" during the most recent Q3 FY 2022 earnings call. According to the figure below, BABA still has much room to grow its ARPU for Chinese customers by entering new product categories and capturing a larger proportion of wallets.
Additionally, as was already said, Alibaba's cloud business has a disproportionately large concentration of clients from the internet sector, which negatively influences the segment's performance in the third quarter of FY 2022. As a result, Alibaba has solid reasons to expand its clientele and pursue new business opportunities beyond the internet sector. The following graphic shows that BABA's cloud segment is looking for future growth prospects in the "public services," "new retail," "new finance," "transportation," and "manufacturing" sectors.
Future Focus Areas For The Cloud Business
Separately, it is realistic to assume that Alibaba's net profit margins will be stable over the next years. In my post from December, I noted that "more investment costs due to tighter competition (in the China commerce industry) may shorten BABA's near-term profitability." The company's other non-commerce ventures, such as cloud, are expanding quickly and should become more profitable due to positive operating leverage as they expand. As I indicated, it is realistic to assume that Alibaba will have sustained profitability overall over the medium term.
Based on the company's latest trading share price of $105.42 as of March 2, 2022, my estimate predicts that Alibaba's shares will be worth $138 in 2025, which suggests a three-year investment CAGR of +9.4 percent. The normalized earnings per share prediction of RMB72.8 (or $11.5) from the sell-side consensus are multiplied by a 12 times P/E multiple to arrive at the $138 price objective. The P/E multiple of 12 seems to be insufficient. However, as I said in my last essay, "trading at a moderate P/E valuation multiple" is acceptable for "a slower-growing corporation whose commercial operations are closely supervised by the government."
What Should Investors Keep an Eye Out For by 2025?
Investors should keep an eye out for two significant triggers by 2025 that might result in more gains.
Potential spin-offs of Alibaba's other operations, such as its logistics company Cainiao or its foreign e-commerce company Lazada, in addition to its China commerce sector, are the first trigger.
Being an online conglomerate, BABA will unavoidably get a holding company discount from the market due to its ownership of several enterprises where information on specific parts is scarce. There are indications that Alibaba may decide to split these operations in the short future.
Alibaba emphasized that "the market has not placed sufficient value on Alibaba's business in terms of how it's being driven by a multi-engine strategy" at its recent Q3 FY 2022 investor briefing. It also stressed that "the full value of each of these businesses together is not being reflected" in its share price and valuations. BABA also said it "will retain an open approach" to "bring in more diversified investor bases and assist these firms to thrive as independent entities." This is more significant.
Reducing legislative and regulatory barriers for Chinese internet enterprises is the second major driving force behind Alibaba's growth.
On March 1, 2022, Reuters reported that Meituan (OTCPK: MPNGF) [3690:HK], another Chinese internet company, would "lower commissions for merchants on its platform" in response to "guidance for online food delivery platforms to reduce service fees to help to lower operating costs for catering businesses."
This most recent incident implies that Chinese officials may still believe that major internet businesses are "over-earning" at customers' cost. Therefore, it will likely take longer before officials loosen the regulatory restrictions on the Chinese internet industry. Alibaba's stock price might rise if and when there is a period in China when there are few or no new rules aimed at internet firms.
In conclusion, spin-offs to reduce the holding company discount and the cessation of regulatory pressure on the Chinese internet industry are Alibaba's two main medium-term re-rating drivers.
Should I buy, sell, or hold BABA stock?
The stock of BABA remains a Hold. In the following three years, up to 2025, I anticipate Alibaba will provide an investment return CAGR of +9.4 percent, as I explained in my valuation for BABA in an earlier portion of this post. This, in my view, only justifies a Hold investment grade; a Buy recommendation would need a CAGR of investment returns at least in the mid-teens.
2022–2023 Alibaba Stock Price Prediction
At $118.79, Alibaba's pricing was introduced in 2022. Today, Alibaba's $119.12 pricing is a 0% reduction from the year's commencement. At the end of 2022, analysts predict Alibaba will cost $127, with a +7% year-over-year change. The increase from now until the end of the year is +7%. The Alibaba price will increase to $146 in the first half of 2023; in the second half, it will increase by $20 and end the year at $166, which is +39% more than the present price.
2024–2028 Alibaba Stock Forecast
Alibaba's price would rise significantly during these five years, rising by 111 percent, from $166 to $351. Alibaba will begin 2024 at $166, rise to $172 over the year's first half, and end at $198. That amounts to a +66% increase from today.
2029–2033 Alibaba Stock Forecast
The Alibaba price would increase by 25%, from $351 to $440. 2029 will see Alibaba begin at $351, rise to $358 in the year's first half, and end at $366. About 207 percent more than now.
The conclusion
It's difficult to advise purchasing Chinese tech stocks, but Alibaba is still standing. By 2025, investors prepared to see beyond the firm's immediate difficulties might own a portion of a $1 trillion corporation, but it could be a very rocky road.
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