Alibaba Group Holdings

Feel free to reach out to PSG Wealth Manager Dawid Botha directly.

Alibaba as a listed company has two core businesses namely e-commerce and cloud computing.

Alibaba is China’s largest e-commerce platform company with a 40% market share. Its Taobao and T-mall platforms have monthly active users of over 800 million. In addition, Alibaba has an extensive e-commerce ecosystem including Alipay and Cainiao Logistics. In China, e-commerce has grown from 10% of total retail sales in 2014 to a whopping 28% in 2023.

Although the growth of Chinese e-commerce penetration has slowed post-COVID, ongoing increases in both e-commerce penetration and China's GDP per capita provide positive momentum for the Chinese e-commerce sector.

Alibaba also owns numerous e-commerce platforms that sell to end consumers and businesses outside China. These include AliExpress, Trendyol and Lazada. Recently this has been one of the strongest growth drivers and one of the areas where Alibaba is investing in to drive future growth.

Alibaba is also China’s leading cloud infrastructure services provider. According to Statista Market Insights, revenue from China’s public cloud market is expected to double in the next four years from US$ 69 billion in 2024 to US$ 137 billion in 2028. 

Developments in artificial intelligence (AI) and Alibaba’s investments in this field are core to the growth prospects of the cloud computing division.

Alibaba is leveraging its vast cloud computing infrastructure to become an investor in Chinese generative AI startups, by offering them credits to use its network resources to train models rather than cash-for-equity funding.  Alibaba’s computing power is highly valuable to these startups, especially given the scarcity caused by US restrictions on exporting advanced AI chips. Alibaba is therefore set to benefit from both the increased use of its infrastructure and growth in AI-empowered software services.

Alibaba's revenue (in USD) more than doubled from 2019 to 2022 but has been stagnant for the last two years which partly led to the share price collapse.  Comparing the investment factors of Alibaba to similar companies in the US, one can see the extent to which Alibaba has fallen out of favour with investors.

Share price movement: Alibaba vs Nasdaq 100 Index

Source: TradingView

Considering the fundamentals of Alibaba’s underlying businesses, improved earnings growth is expected, which should bolster the share price from these levels.

Alibaba has a market capitalisation of US$200 billion. For the fiscal year ending in March 2024, it generated free cash flow of US$21.6 billion, translating to a highly attractive free cash flow yield of 10.8%. Additionally, Alibaba has a net cash balance close to US$50 billion. By funding acquisitions through its computing-for-equity investment strategy, Alibaba has more cash available. In the last year, the company repurchased US$12.5 billion in shares (5.1% of outstanding shares) and paid out US$2.5 billion in dividends. This translates to a net buyback yield of 6.2% and dividend yield of 1.3%.

Despite ongoing regulatory and broader economic uncertainties in China, Alibaba maintains its status as a high-quality, cash-generative and growing business within the world's largest internet market. At the current market price, we feel investors are most likely being compensated for the risks associated with China. Alibaba is a buy and well-represented in our client portfolios.