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Alibaba (New York Stock Exchange:Baba), Chinese tech giants disappointed investors in 2023, while many of their US peers delivered strong returns. Alibaba stock has fallen about 40% over the past 12 months, but new catalysts have emerged that could drive the stock higher in 2024. Regulatory risks need to be closely monitored, but I’m bullish on Alibaba stock.
Softbank finally completes sale of Alibaba
Softbank (OTC:SFTBF), a Japanese investment firm led by billionaire Masayoshi Son, was one of the first institutional investors to believe in Alibaba. The investment firm invested $20 million in Alibaba in 2000. In late 2021, SoftBank entered into a futures contract with subsidiary Skybridge to sell Alibaba shares. The agreement allows SoftBank to buy back Alibaba shares from Skybridge if necessary.
On January 25, SoftBank announced the settlement of these prepaid contracts with Skybridge, reportedly recording a profit of approximately $8.5 billion from its investment in Alibaba. The investment firm has decided not to make any new purchases or sales of Alibaba stock in the foreseeable future. The company currently holds about 0.5% of Alibaba shares, but as of 2021 it held 32% of Alibaba shares.
From a technical perspective, the massive selling pressure generated by SoftBank over the past few years is due to the upward trend in Alibaba stock despite the company spending huge sums on share buybacks. It became a barrier. For reference, the company spent $10.2 billion on share buybacks in the last 12 months.
If the company’s financial condition continues to be strong, it seems reasonable to think that share buybacks will ultimately have a positive impact.
Founders and CEOs are betting on Alibaba
On January 23, SEC filings revealed that Alibaba founder Jack Ma and current chairman Joe Tsai had both purchased shares in the company, while SoftBank was withdrawing from its investment. It shows that their sentiment about the company’s prospects is improving. Mr. Ma bought $50 million worth of Alibaba stock, and Mr. Tsai invested $151 million in the company through his family’s investment fund.
After these deals, Jack Ma and Joe Tsai became the company’s two largest shareholders, ending SoftBank’s years-long reign. The return of the founding member as the company’s largest shareholder could boost investor sentiment in the coming months, as Alibaba shares soared more than 7% following the release of SEC filings disclosing these transactions. This was clear from the initial market reaction on January 23rd.
Alibaba enjoys long road to growth
Alibaba’s investment appeal stems from two factors: the long growth runway it has enjoyed and its cheap valuation.
Alibaba has emerged as a leader in China’s cloud computing field. This market is expected to grow rapidly in the coming years as businesses of all sizes move to the cloud.according to canaris According to the data, Alibaba Cloud accounted for 34% of China’s cloud market as of the end of the first quarter of 2023, with Huawei Cloud in second place with a market share of 20%.
according to Statista, China’s public cloud sector revenue is expected to grow at a CAGR of 18.7% until 2028, with a market value of $137 billion at the end of the forecast period. The continued integration of AI capabilities in the cloud market will be one of the key growth drivers over the next five years.
Alibaba enjoys quantifiable pricing power in this market segment, and the company consistently reports high renewal rates compared to many of its peers. These observations suggest that Alibaba is well-positioned to take full advantage of the expected growth in the cloud market.
The company is integrating AI into its digital retail technologies, including developing integrated core technologies and solving language translation challenges. In the digital media entertainment space, the company uses its AI to create next-generation content and enable process-based digitized film and television production capabilities.
Although a complete business separation may no longer be considered, Alibaba continues to explore ways to manage its business units independently, which should allow the company to unlock hidden value in the coming years. is. This will also be a driving force for growth.
At a more detailed level, the company has developed an ambitious vision for each of its major business segments. Examples include 1688, which aims to leverage products manufactured in China with corporate customers in mind, Xianyu, which aims to be a lifestyle platform that is not limited to second-hand goods, and DingTalk, which aims to be China’s best AI smart assistant system, and to sell knowledge. Examples include Quark, which targets students. Youku is committed to prioritizing self-produced content to compete in the video content niche.
Is Alibaba stock a buy, according to Wall Street analysts?
BABA stock is rated a Strong Buy based on ratings from 20 Wall Street analysts. Alibaba’s average price target is $118.20, implying a potential upside of 63.4% from the current market price.
Alibaba trades at a deep discount compared to historical valuation multiples and its U.S. peers. The company’s forward P/E ratio is 8.2x, and the five-year average forecast P/E ratio is 18.15x. To add more context, see Amazon (NASDAQ:AMZN) has a forward P/E ratio of 59.4.
Alibaba’s cheap valuation has attracted many Wall Street bulls in recent months, but the stock hasn’t performed as well as expected due to investor concerns about Chinese regulators and other macroeconomic factors. do not have.
Bottom line: Alibaba stock is nearing a turning point
Alibaba’s stock price has remained undervalued for about two years. A new catalyst for stock price gains emerged today in the form of SoftBank’s completion of its planned sale of Alibaba shares and progress on regulatory reform. Now that the tide is tilting in its favor from both a regulatory and financial performance perspective, the company appears attractively valued for long-term investors.
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