Should You Hold Alibaba (BABA)?

[View in browser]( [The Spill Logo] BROUGHT TO YOU BY: [Logo]( Proprietary Data Insights Financial Pros’ Top Chinese Stock Searches in the Last Month Rank Ticker Name Searches #1 [BABA]( Alibaba 55 #2 [NIO]( Nio 22 #3 [JD]( Jd.com 17 #4 [LI]( Li Auto 8 #5 [PDD]( Pinduoduo 8 #ad [Retirement help at your fingertips]( Brought to you by [Sprott]( [Explore Investment Opportunities]( [Sprott - Explore Investment Opportunities]( A global leader in precious metals and critical materials investments designed with trust, transparency, and traceability in mind. Sprott’s distinct combination of physical bullion and mining equities investments allows you to potentially enhance your portfolio with materials that support the energy transition. Explore your investment options today. [Learn more.]( Should You Hold Alibaba (BABA)? Alibaba (BABA) has grown 20% per year on average for the last five years. Over the last decade, it’s been 33.5%. At $90 a share, the stock is well off its all-time high of $319 in late 2020. Yet, the stock is up just 30% from when it went public in late 2014. Chinese government crackdowns made foreign investors extremely wary. Only recently has management deployed the nearly $100 billion in cash on its balance sheets for share buybacks and dividends. That’s caught the interest of financial pros who searched out this stock more in the past month than any rolling 30-day period in the past year. So is this stock a dirt-cheap bargain or a value trap? Alibaba’s Business Alibaba is a name that's been making waves in the global tech scene. As China's largest e-commerce company, Alibaba has created a massive ecosystem that brings together businesses and millions of consumers from all over the world, offering a one-stop-shop for online and mobile commerce, cloud computing, digital media, and more. So, what's Alibaba all about? Imagine if Amazon, eBay, and Google Cloud had a baby – that's kind of like what Alibaba is for China and beyond. For example, Taobao, one of Alibaba's platforms, is like China's version of Amazon, while Tmall is similar to a mega-mall filled with big-name brands. And if you're a business looking to expand globally, Alibaba.com is the go-to wholesale marketplace that connects buyers and sellers from over 190 countries – that's almost every country in the world! Now, let's break down how Alibaba makes its money: - Taobao and Tmall Group (46% of total revenues) – This is like Alibaba's version of Amazon and eBay combined, handling both retail and wholesale business in China. - Cloud Intelligence Group (11% of total revenues) – Similar to Google Cloud or Amazon Web Services, this segment provides cloud computing and AI-related products and services. - Alibaba International Digital Commerce Group (11% of total revenues) – If you've ever shopped on AliExpress or Trendyol, you've experienced a taste of what this segment has to offer. - Cainiao Smart Logistics Network Limited (11% of total revenues) – Think of this as Alibaba's own FedEx or UPS, ensuring that all those products get delivered to customers quickly and efficiently. - Local Services Group (6% of total revenues) – Imagine if DoorDash or Grubhub were part of Amazon – that's kind of what Ele.me, a leading on-demand delivery and local services platform in China, is like for Alibaba. - Digital Media and Entertainment Group (2% of total revenues) – From the Youku video streaming platform (similar to YouTube) to other entertainment assets, this is where Alibaba's media magic happens. Despite Alibaba's impressive growth and dominant market position, it often finds itself hamstrung by Chinese government regulators. The tech giant has been a primary target in the government's crackdown on private enterprises, including antitrust investigations, fines, and forced restructuring. In 2021, Alibaba was fined a record $2.8 billion for anti-competitive practices and forced to split into separate legal entities. Moreover, Jack Ma, Alibaba's charismatic founder, has largely disappeared from public view since criticizing China's regulatory system in late 2020. As a result, Chinese stocks trade at a significant discount to similar global companies. Financials [Financials] Source: Stock Analysis Alibaba has been incredibly successful expanded its business. However, that has come at a cost to its margins in recent years. Diversification into logistics, food delivery, and cloud computing in 2017 to 2018 hit gross margins. In 2021, the acquisition of Sun Art hypermarket added a new low-margin business line. Nonetheless, Alibaba has managed to churn out incredible amounts cash at $25 billion from operations annually. Yet, the company only spends $5 billion on Capex and between $2.5 billion to $5 billion on acquisitions annually. They generate so much money that they invest $15 billion annually in securities. Thankfully, they’ve started to give $15 billion annually back to shareholders, an astounding 7.0% yield. Valuation [Valuation] Source: Seeking Alpha Despite its phenomenal growth, healthy balance sheet, and generous cash returns, Alibaba trades at just 15x forward earnings and 8.5x operating cash flow. That’s in line with many Chinese companies, though higher-growth entities like Li Auto (LI) and Pinduoduo (PDD) can trade at higher multiples. But to give you an idea of the China discount, Amazon trades at 40x forward earnings and 19x operating cash flow. Growth [Growth] Source: Seeking Alpha Amazon is a good point of comparison because it’s seen revenue growth comparable to BABA over the last five years. Yet, it has performed better with earnings and free cash flow growth. So, it makes sense that Alibaba would trade at a discount to Amazon. But does 50% of the value make sense? Profitability [Profit] Source: Seeking Alpha Except for gross margin, Amazon’s margins are in fact lower than Alibaba’s. Compared to its peers, Alibaba is quite profitable. Yet, its decline in profitability has limited its equity, assets, and total capital returns. [Your Money, Your Answers: The Juice Perspective]( Confronting unaffordable housing or a high cost of living? Wrestling with retirement savings decisions? Uncertain about where to invest? The Juice shares your concerns and dedicates its time to address the financial questions affecting you and your family's future. [Subscribe now for insightful solutions.]( Our Opinion 7/10 We’ve been fairly bearish on Alibaba in the past. However, it's now at a point where the value starts to make sense, provided they continue returning cash to shareholders. With a 7% yield on such heavy revenue growth, it’s hard to ignore the stock. Nevertheless, it should be approached with caution, given the geopolitical risks. 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