When Alibaba (BABA +1.47%) reported results for its fiscal 2023 fourth quarter (ended March 31), they were a bit of a mixed bag. Revenue of $30.3 billion missed Wall Street expectations, but adjusted diluted earnings per American depository share of $1.56 beat analyst forecasts.
Nonetheless, a key theme on shareholders' minds continues to be the macroeconomic backdrop. As of this writing, Alibaba shares are down a jaw-dropping 75% from their peak, which was set in October 2020.
But the China-based company is in the midst of some transformative steps to unlock shareholder value. While it's been beaten down, this growth stock is one that investors should consider buying now.
NYSE: BABA
Key Data Points
China's economic reopening
Like Amazon, which many readers might be more familiar with, Alibaba's bread-and-butter business line is e-commerce. Popular sites include Taobao and Tmall in China and Lazada in Southeast Asia. During the most recent fiscal quarter, 74% of overall company revenue was from these shopping segments, called China Commerce and International Commerce. This is clearly very important to Alibaba's operations.
The pandemic, while generally a boon for online shopping, resulted in a headwind for China, which had to deal with ongoing lockdowns. Now that the economy is reopening, consumer sentiment may be turning positive. This could turn into a major tailwind for Alibaba's business as Taobao and Tmall together represent the world's largest digital retail platform by gross merchandise volume, according to management.
"In the past few months, we have noticed a gradual recovery in China consumption, but consumer confidence and spending power still need further momentum," CEO Daniel Zhang mentioned on the Q4 2023 earnings call. This only presents investors with upside as things hopefully normalize, placing Alibaba in a position to benefit.
Unlocking shareholder value
Stealing investor attention recently was news that Alibaba plans to undergo a huge corporate reorganization, splitting into six separate business lines. The objective is to allow each segment to operate freely and independently, which can lead to better decision-making, faster responses to market changes, and the ability to raise capital on their own. Plus, it can appease regulatory authorities who may think Alibaba is too large right now.
Of all of these strategic moves meant to reorganize the business, perhaps the most notable is the spinoff of the cloud unit, called the Cloud Intelligence Group. According to Statista, Alibaba is the biggest cloud infrastructure service provider in China, and the fourth largest in the world by revenue. The segment saw sales drop 2% versus the year-ago period, but there's no doubt that investors would love to have a direct ownership in the leading pure-play cloud company in China.
Existing Alibaba shareholders would get a piece of the new cloud standalone entity, which could be a nice addition to anyone's portfolio. Otherwise, the shares could be sold for cash if investors aren't interested in holding.
Lots of free cash flow
The Federal Reserve and other major central banks across the world have implemented aggressive monetary tightening policies with the stated goal of bringing inflation under control. This has raised the cost of capital for companies, hurting some much more than others. In economic times like now, when many are expecting a recession to happen, investors might be better off seeking financially sound businesses.
Alibaba fits this description. In the last fiscal year, the tech giant produced $25 billion of free cash flow (FCF), up 74% year over year. And as of March 31, the company had about $76 billion combined of cash, cash equivalents, and short-term investments. When compared to the $23 billion of bank borrowings and unsecured senior notes, it's evident that Alibaba has a strong balance sheet.
This favorable financial position has allowed management to repurchase a lot of shares. In fact, Alibaba spent $10.9 billion on stock buybacks last fiscal year, equal to over 5% of the current market cap (as of May 31). This benefits existing shareholders by boosting earnings per share, and it's a sign that the leadership team thinks the stock is undervalued.
With a robust stock buyback program, sizable free cash flow, ongoing economic reopening, and major cloud spinoff, Alibaba presents plenty of compelling reasons now for investors to consider adding the stock to their portfolios.
