How low can you go? That's the question some Alibaba (BABA +0.69%) investors might be asking as the stock slips close to its lowest-ever valuation. Alibaba's price-to-sales (P/S) ratio today stands at 1.5, just a fraction of its five-year average of 5.1. Similarly, its price-to-earnings (P/E) ratio is 10.3 vs. a five-year average of about 33.
Bargain hunters are sniffling around for value, but it's not a sure thing. A stock could stay cheap forever unless the company does the right thing to turn around the ship. Fortunately, it looks like Alibaba has a clear plan to unlock shareholder value.
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Delivering almost zero value to shareholders
Alibaba was at its peak when it came public in 2014. Then, it was the de facto e-commerce company in China, a leader in its technology industry rivaled only by Tencent, and its prospects for growth seemed unlimited.
Today, most investors shun the company like the plague. It faces severe competition from Pinduoduo and Douyin, it's no longer among the top-two technology companies in China by market capitalization, and its future looks bleak. Above all, long-term investors have suffered with the share price sinking to around $70 today, not far from its IPO price of $68.
While it may seem like the company did nothing over the years, that would be untrue. In the fiscal year ended March 31, 2015, Alibaba's revenue was 76 billion yuan ($12.3 billion) and net income totaled 24 billion yuan ($3.9 billion). But in the fiscal year ended March 31, 2023, revenue reached 869 billion yuan ($126.5 billion) while net profit touched 73 billion yuan ($10.6 billion). In other words, revenue has increased by more than 10-fold while net profit more than tripled.
But unlike 2014, when investors were optimistic about Alibaba's prospects, investors today are incredibly pessimistic. The tech company failed to list its affiliate company Ant Group a few years ago, its crown jewel e-commerce divisions (Tmall and Taobao) delivered a 1% decline in revenue in the last fiscal year, and it recently axed the spinoff of its cloud computing business.
All of these factors have led to a contraction in its valuation.
NYSE: BABA
Key Data Points
But things could change in the future
Alibaba has not been idling when it comes to addressing its problems. It announced a breakout of its empire into a few major business units a while ago, giving each business unit its own board and management team to run the business with total autonomy. It also reshuffled its management team, replacing longtime CEO and chairman Daniel Zhang with new CEO Eddie Wu.
Furthermore, in the latest earnings call, the new management team, led by CEO Eddie Wu and chairman Joe Tsai, reiterated its focus on unlocking value to improve shareholder returns. To this end, the new team shared its four priorities to create value.
Firstly, it will enhance the return on invested capital of its operating businesses, raising it from single to double digits. If successful, this will improve Alibaba's profitability in the future. Next, it will continue to invest in growth, focusing mainly on the core businesses, such as e-commerce, cloud computing, and logistics.
Besides, it will monetize the non-core assets, which include $67 billion of equity securities and investments on its balance, as well as other non-core operating businesses with low growth or low returns. This means investors could receive dividends or stocks as Alibaba monetizes these assets.
Last but not least, Alibaba has also started paying dividends in the latest quarter and will continue repurchasing its stocks.
In short, the new management team has set a clear direction to unlock shareholder value. Still, these won't happen overnight, so investors must be patient as the company executes its plan.
What it means for investors
Stock investing has never been easy. Investing in Alibaba, especially in the last few years, has been difficult (especially for Western investors) as it went through issues like the Chinese government crackdown, the cancellation of the Ant Group IPO, and others.
Still, there is hope that the new management is trying to solve these problems to unlock shareholder value. While it's still early days, I'm cautiously optimistic about the management's plan and will closely watch the company's execution over the next few quarters.
