Alibaba (BABA.US) beat forecasts for revenue and EPS for the latest quarter in its earnings report last week, showing the stock soared. Due to uncertainties related to COVID, Alibaba did not release its earnings guidance that it typically offers earlier in the year. Strong account consolidation and stock repurchase program reflect great value for investors, as does an unreasonably low P/E ratio.
Alibaba shares rose as much as 15% after the Chinese e-commerce company reported results for the final quarter of fiscal 2022 on Thursday. Alibaba easily beat revenue and profit predictions in a context where sentiment towards Chinese companies has deteriorated too much at present. Although Alibaba did not offer its guidance for fiscal 2023, the company's valuation still makes very little sense. Investors are underestimating Alibaba's earnings potential.
Previous expectations
Low expectations were the main reason why Alibaba surprised in its results. Reporting Q4 2022 Adjusted EPS of $1.18, which beat forecasts by $0.10. In addition to substantially improving the revenue figure. Here is the summary:
The growth of Alibaba's e-commerce
Overall, Alibaba's revenue rose 9% in the latest quarter to 204.1 billion Chinese yuan (CNY), which is estimated at $32.2 billion. Alibaba's core e-commerce revenue in China rose 8% year-on-year to 140.3 billion Chinese yuan ($22.1 billion), an improvement from the previous quarter, which saw 7% growth. % on gross receipts. Alibaba slightly improved its performance in its most important business quarter on quarter. It also saw continued strength in local consumer services, where revenue rose 29% year-on-year to 10.4 billion Chinese yuan ($1.6 billion), and the cloud segment, which saw revenue rise 12% year-on-year to the 19 billion Chinese yuan ($3 billion).
source: earnings ALIBABA
What stood out positively from Alibaba's post was that the company continued to make progress in expanding its e-commerce platform despite a challenging macro environment. Alibaba added 28 million new accounts to its ecosystem in the last quarter, most of which (25 million) came from China. Alibaba's domestic e-commerce business remains the company's largest source of revenue, contributing 69% of total revenue. However, Alibaba also has a great opportunity to grow its other businesses, especially its logistics operations that are vertically integrated into Alibaba's e-commerce operations and its cloud segment.
source: earnings ALIBABA
Alibaba ended the quarter with 1.3 billion active customer accounts on its company. Over the past year, Alibaba added 177 million new customers to its platform, creating a strong foundation for long-term results and free cash flow growth.
Alibaba share buyback program
Before Alibaba released its results, the market priced in the possibility that the company would use its cash flow from the previous quarter to consolidate the balance sheet by buying back a significant number of shares. Considering Alibaba had just increased its share buyback from $15 billion to $25 billion at the time and shares were trading at unreasonably low prices in March, coinciding with the start of the war in Ukraine.
In the fourth fiscal quarter of 2022, Alibaba repurchased approximately 17.8 million of its American Depositary Shares (ADRs - US-listed shares) for approximately $2 billion. He had expected a minimum share buyback of $2 billion. In the past year, Alibaba repurchased 60 million ADRs for a total price of $9.6 billion.
source: earnings report ALIBABA
Omission of the results guide
Alibaba did not provide earnings guidance, which it normally does at the beginning of the fiscal year. The e-commerce firm cited uncertainties related to COVID-19 as a reason for not offering that information. Normally, the lack of guidance is not well received and the actions of companies that do not guide are punished by the market. In this case, however, things are different. Alibaba shares have been so battered since the fourth quarter of 2020 that investors are celebrating even more lackluster results.
Alibaba's Valuation could be wrong: E-Commerce Prospects Undervalued
The market's valuation on Alibaba is very punished. On the one hand, you have to remember that Alibaba is very profitable. It generated net revenue of 47.1 billion Chinese yuan ($7.4 billion) in fiscal 2022, while adjusted net income was 136.4 billion or $21.5 billion. There is great profitability in the Alibaba business and investors don't seem to appreciate this at the moment. In addition, we are dealing with one of the world's largest e-commerce empires in terms of account size and scope, yet Alibaba's valuation does not yet reflect those factors. Alibaba shares are trading at a P/E ratio of 10x. JD.com (JD), for example, has a P/E ratio almost double that of Alibaba. When Alibaba's historical valuation has been up to 30x. As incorrect as Alibaba's valuation is, it represents underlying value and low risk.
source: Seekingalpha
Still, there are risks with Alibaba
Alibaba faces ongoing frontline risks related to a slowdown in the Chinese e-commerce market. While it is investing in other businesses to diversify its revenue mix, continued moderation in growth in its core business poses a risk to Alibaba and its stock's performance. Therefore, it is important to pay attention to the evolution of Alibaba's earnings and free cash flow, should they seriously deteriorate or if Beijing announces further crackdowns on the company.
Final considerations
Despite the circumstances with COVID-19 lockdowns and regulatory attack in the last year, Alibaba reported well by posting 9% revenue growth.
Sure, it has some problems, like slowing revenue growth and reliance on domestic e-commerce transactions, but the company's unreasonably low valuation isn't part of them. Alibaba added a significant number (177 million) of new accounts in the last twelve months, which speaks to the strength and attractiveness of Alibaba's various e-commerce platforms.
Technical analysis
From this perspective, there is no change, although corrections will most likely continue. Investors will be watching for the bullish divergence shown by the RSI indicator. But we should not be overconfident, since in other previous periods, the stock ended up giving in to the selling pressure. Generating a new corrective movement like the one projected in the image (ABC).
source: xStation
Darío García, EFA
XTB Spain
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