Why Alibaba is Undervalued

Alibaba is undervalued by 60% here's why...

Hello everyone, for the past couple of weeks I have been deciding my next investment for my portfolio. My criteria is simply to find great businesses to invest in. As of today my portfolio consists of the majority google position and leftovers in the MSCI emerging markets index. I ventured off into the Chinese market because China's growth rate as an economy is amazing at 5% per year and the policies in China can change and will change in the way of how the global market is moving unlike America. Where it takes substantial action and time to get stuff done via Congress. And due to China-US trade uncertainty I think due to investors' expectations being grim as of now there are a lot of undervalued great businesses in China ready to invest in. This is my underlying rationale for investing in the chinese markets as I chose a great company Alibaba and I will go in depth as to explain why I am choosing them instead of any other company.

What is Alibaba?

Before looking into the company's finances we have to understand what the company does. Founded by jack ma in 1999 started as a wholesale ecommerce operation mimicking amazons operations but in china. Fast forward 26 years later it is an ecommerce giant and it is now growing its other businesses now like its international wholesale and retail operation and its cloud operations, and also venturing into AI with its Gwen models and now Alibaba has over 8 main sources of revenue. Now that we have a pretty overview stance of the company lets look into its books.

Alibaba's financial health

I will be looking at FY2020-2024 numbers I am investing for the long term but I will still touch on quarterly numbers to see how it's doing in the short term and all numbers will be in USD. Alibaba's Revenue in 2024 was $138 billion dollars growing 31% since 2020 strong robust growth even in the midst of covid and a lot of regulatory challenges it faces doing business in a communist economy. Its net income stood at $17 billion and it fell 22% since 2020. Net income hit a low point of $9 Billion in 2021 from a high of $22 billion in 2020. A string of bad things happened in 2020 Covid hit and that obviously impacted the whole world then in late 2020 jack ma openly criticized the chinese financial system and he "disappeared" for a year. This disappearance obviously had an impact on investor perception of the company hence why the net income declined and the stock price declined from a high of $304 in late 2020 to a low of $63 in 2022 and also America and the world was plagued with high rates in 2022. All of these things added up to show the decline in net income. Every other aspect of Alibaba has grown since 2020 and its net income has grown 100% since its low point in 2021. Its net income will grow and exceed its previous high of $22 billion. Now looking at their cash flow Alibaba has FCF of $10 billion in 2024. This is a major decrease from a high of $27 billion in 2020 but I still think Alibaba will stabilize and all will return to normal but still FCF of $10 billion is pretty damn good. Now Alibaba is very capital light which is a good sign this means the business is agile when it comes to consuming cash it doesn't need to consume a lot of cash to operate. It spends 8% of Revenue on Capex which is very light. Now looking at its balance sheet it has assets of $248 billion in 2024 this is a 3% decrease since 2020 and it has liabilities of $98 billion and an increase of 3% since 2020. You can make the argument that liabilities have increased at a faster pace than assets but looking at the numbers assets dwarf liabilities and its current assets can take care of 99% of the total liabilities which is a very good sign. Now looking at its indebtedness Alibaba has net debt of -$29 Billion but total debt has increased 25% since 2020. Alibaba is very debt light. They raise more equity than debt which is good. Debt to equity ratio is .25. In total since 2020 every major metric has increased for Alibaba except for its net income which is on track this year or next year to beat its previous high of $22 Billion. Yet all of this good news its stock price has stagnated at $100 since 2022 but YTD it is up 22%. I think investor perception will pick up this year and the stock price can not go below this price point of $107 even at this price point you are getting a good deal.

Sources of Revenue

Alibaba has 8 main sources of revenue. Let's break them down. Its main source of revenue comes from Alibaba core which is its B2C platform domestically in China. This consists of many companies but the main ones are Tababo and Tmall. They accounted for $58 Billion in revenue in 2024 this is a 15% decline since 2020 this shows major competitors are taking market share away from Alibaba in 2020 from its main business. This could be viewed as a red flag but overall revenue has increased 31% since 2020. Now their second biggest source comes from their cloud intelligence group, basically their cloud infrastructure. It has accounted for $16 billion in revenue in 2024 this is an 84% increase since 2020! Now on to the third source is Alibaba international retail $15 billion in 2024 200% growth since 2020! This tells me Alibaba has a lot of room to grow on the international stage since most of their revenue comes from domestic sales! Now on to the fourth Cainiao Smart Logistics Network in 2024 it amassed $14 billion a 155% growth since 2020! The fifth source of revenue is Local services $9 billion in 2024 and grew 99% since 2020. The sixth is Alibaba core wholesale $3.37 billion in 2024 and has grown 59% since 2020. On to the seventh is international wholesale business which brought in $3.30 billion and has grown 55% since 2020, and their last main source of revenue in Hujing Digital Media and Entertainment which brought in $3.08 billion in revenue and has decreased 33% since 2020. Now across all the underlying businesses of Alibaba they have grown collectively 75.5% on AVG since 2020 this comes out to 11.9% per annum growth of Alibaba's underlying businesses. All but two businesses grew since 2020 there main business alibaba core and there media business. For the decline in their main business this can be accounted for by competitors like Tencent and Jd.com taking market share because in the same time period jd.com’s domestic retail business grew as well. Even with their main business on a decline it seems the overall company alibaba experienced there total revenue still grew 31% since 2020 and net income on the rise growing 100% since 2021. Alibaba has to stabilize their main business and continue to grow their other businesses like they have been doing at such a robust growth rate!

Competitors and sources of concern

Now numbers wise it looks all good and all but its time to look at its top competitor Tencent and some headwinds Alibaba may face. I know jd.com is a very valid competitor but for sake of time I will focus on the better competitor Tencent. I wont go into much depth because it would take all day but will do a quick overview of the business. Now its Revenue and Net income stood at $91 billion and $27 Billion respectively in 2024 this is a 31% and 16% increase since 2020. Now looking at these numbers Tencent grew strong since 2020 and didn't have any internal issues. Also, it has better net margins than Alibaba. This shows them running a more efficient operation than Alibaba but overall growth has been similar. Now Tencent uses 14% of its revenue on Capex which is way more than Alibaba and they are a smaller operation as well. Not a bad signal but it just shows they are more capital intensive than Alibaba. They have FCF of $27

Billion and it grew 20% since 2020 more FCF than alibaba which shows they have more free capital to spend on day to day operations. Assets and liabilities are around the same as Alibaba so there's nothing to look at there but Tencent has net debt of $2.24 Billion and total debt has grown 22% since 2020. Not much debt but Tencent is more indebted than Alibaba. Now the red flag for my part is Tencent has only 4 main sources of revenue and their underlying growth has been decent. Their main source of rev comes from value added services which brought in $44 billion in 2024 and grew 15% since 2020. Now on to the second is there fintech services they have wechat which is like whatsapp but with venmo inside of it. This brought in $29 billion in 2024 and has grown 55% since 2020. The third source is their marketing business and it brought in $16 billion in 2024 and grew 41% since 2020. Now on to their last source is “other” and it brought in $1 Billion in 2024 and has grown 0% since 2020. Overall Tencent's businesses grew 28.5% on average since 2020 which is 5.2% growth per annum. Alibaba's underlying businesses have been growing at a way faster rate than tencent and also alibaba has 4 more sources of rev than Tencent and in way better and hot industries as well. Also alibaba is investing in AI and if a company in China will be a leader in AI alibaba will be involved in some way. Now some concern I have for Alibaba is that it is in a communist country and the government there can essentially do what they want to any company and if they do something out of the blue this will cause investment to flee China as a whole and this is not good for the stock overall. Nobody wants to invest in a country where the government can do what they want with your investment at will. But I think Xi is smarter than this and understands he has to be on the winning side of politics and to do this you need a robust economy and government intervention won't help that. Another cause of concern is also trade uncertainty with China and all the major markets. In Q1 2025 Net income decreased to $1 billion from $6 billion for Alibaba and this could be marked up to trade uncertainty. But long term president trumps knows uncertainty isnt good so I think a well thought out trade deal will be in place soon. Now my last cause of concern is China's domestic consumption. As we know China is very willing to sacrifice domestic consumption for low cost products to be shipped world wide and most of alibabas rev comes domestically so if there is low consumption domestically this isn't good for Alibaba.

Conclusion

After this deep dive all the numbers are adding up. The stock has declined and stagnated since 2020 but the underlying business has grown and is growing at a robust rate at 11.9% per annum. Still with this backdrop investors don't notice that Alibaba is a great business and is looking to be invested in. I also saw ray dailo and bridgewater associates took a large position in Q1 in Alibaba 3% of his portfolio. I think this isn't just a one off occurrence but a real opportunity. Alibaba is a great company and very undervalued and other top notch investors see this too. Now for the concerns I had I think long term most of these problems will be smoothed out and in the long term overall the Chinese economy will have robust growth and with that Alibaba will grow to its 2020 levels when the stock was at $300+ and go past that for comparison the stock is at $107 as of now and the underlying numbers are trending to 2020 numbers. That in itself should tell you something.