Alibaba: Unlocking Shareholder Value

Alibaba's (NYSE:BABA) stock has been beaten down for years, dropping to a low of around $60 recently, representing a staggering 81% from its all-time high in 2020. While Alibaba's stock quickly doubled from the significant low, shares remain volatile. Nevertheless, Alibaba recently successfully tested the $80 support level, and the stock's chart has a bullish reverse head and shoulders pattern developing.

Alibaba 3-Year Chart

Furthermore, Alibaba's stock remains cheap, and I mean dirt cheap. Alibaba is trading at a forward P/E ratio of around ten here, and that's relative to the lowered consensus estimates. Alibaba should regain significant growth momentum as it achieves higher than anticipated revenues and more profitability in the coming years. Despite resolving the delisting concerns and other issues about its stock, Alibaba's shares remain incredibly cheap here and represent an excellent long-term buying opportunity.

I began writing this article before the sensational announcement that Alibaba plans to split into six separate entities. In yesterday's session, Alibaba's stock quickly bounced on the news, elevating it by approximately 14%. The break-up announcement is excellent news for the company as Alibaba has suffered from government scrutiny and has become too big to sustain robust double-digit revenue growth.

After all, we're looking for growth from a growth company, paying a premium for its shares. Unfortunately for Alibaba, the company became too big and bureaucratic. This dynamic led to less efficiency, negatively affecting margins and Alibaba's overall profitability. Instead of continuing its stellar growth, Alibaba stalled, and its share price tumbled by more than 80% (from peak to trough).

However, now that Alibaba is splitting into separate entities, the significant value should be unlocked for shareholders. An essential factor weighing down the company's stock is its unprofitable secondary businesses which are treated more as liabilities than valuable assets that should grow and become profitable in time.

The Company Will be Split up into Six Units

• The Cloud Intelligence Group - Cloud and artificial intelligence segments.
• The Taobao Tmall Commerce Group - Online shopping platforms like Taobao and Tmall.
• The Local Services Group - Alibaba’s food delivery service and mapping.
• The Cainiao Smart Logistics - Alibaba’s logistics service.
• The Global Digital Commerce Group - Alibaba’s international e-commerce businesses AliExpress and Lazada.
• The Digital Media and Entertainment Group - Alibaba’s streaming and movie business.

This genius breakup should create significant growth for Alibaba's businesses, improve sentiment, and reduce regulatory pressures, unlocking enormous shareholder value simultaneously. Businesses that seemed unprofitable and unpopular could receive an influx of capital, implying that Alibaba's market cap is significantly undervalued here.

Alibaba's Diverse Business Portfolio

Alibaba is a diversified conglomerate that should be worth much more as individual units rather than Alibaba's current "all in one." We should see substantial investments flow into Alibaba's units, leading to growth and increases in valuations. Moreover, in time, Alibaba's smaller segments could blossom into precious and profitable stand-alone companies.

Segment Revenues

• The Cloud Intelligence Group - $5.4 billion (six months)
• The Taobao Tmall Commerce Group - $39 billion (six months)
• The Local Services Group - $3.33 billion (six months)
• The Cainiao Smart Logistics - $3.59 billion (six months)
• The Global Digital Commerce Group - $4.4 billion (six months)
• The Digital Media and Entertainment Group - $2.2 billion (six months)

If we annualize the revenues, we can see Alibaba's units recently delivering approximately $116 billion. Alibaba's total revenues in 2022 came in at $126.6 billion, and its 2023 consensus revenue estimate is roughly $127.2 billion. However, next year's consensus estimates point to approximately $141 billion in revenues and about $156 billion in revenues in 2025.

Revenue Estimates - Could be Too Low Now

The estimates could be lowballed now, and Alibaba will provide approximately $150 billion in revenues next year and approximately $160-165 billion in 2025. Alibaba's market cap is only around $250 billion here, illustrating that its shares are dirt cheap, trading at about 1.67 times forward sales.

EPS Estimates - Could Move Higher Soon

EPS estimates have been brought down recently, and Alibaba continuously beats the lower estimates. This trend will probably persist, implying Alibaba should achieve higher than anticipated EPS as the company advances. Next year's consensus estimates are around $9, but Alibaba could earn $10. Furthermore, instead of delivering $10 (in EPS) in 2025, Alibaba's EPS could be closer to $12. Therefore, if the company earns $10 next year, its shares are trading below a ten-forward P/E rate.

So, What's Each Unit Worth?

First, let's estimate each segment's revenues next year. The company can deliver approximately $150 billion in revenues next year, so we can approximate how much each unit could provide. Moreover, this assessment should provide an approximate value for each unit as they get spun off.

• Cloud Intelligence Group - $13 billion (revenues) x 6 times sales = $78 billion valuation.
• Taobao Tmall Commerce Group - $100 billion (revenues) x 2.5 times sales = $250 billion valuation.
• Local Services Group - $8 billion (revenues) x 3 times sales = $24 billion valuation.
• Cainiao Smart Logistics - $9 billion (revenues) x 3 times sales = $27 billion valuation.
• Global Digital Commerce Group - $13 billion (revenues) X 3 times sales = $39 billion valuation.
• Digital Media and Entertainment Group - $7 billion (revenues) 2 times sales = $14 billion valuation.
• Total Revenues - $150 billion in revenues (2024, my estimate)
• Total Proposed Post-Breakup Valuation: $432 billion

The Bottom Line

Alibaba's businesses may be undervalued by about $182 billion here. Moreover, this valuation is relatively conservative and doesn't factor in future growth probabilities and other factors that may provide additional catalysts for higher valuations of the individual spinoffs. Provided the company's valuation of around $250 billion now, a $432 billion valuation represents approximately a 73% upside. The company's stock price is around $98, and a 73% upside implies a price worth roughly $170.

Moreover, the $170 price target may only be the beginning as the separate spinoffs should unlock substantial value and may be worth significantly more in the coming years. Regardless, Alibaba's stock price should be worth much more due to increased potential for growth, higher margins, increased profitability, fewer regulation risks, and other constructive factors associated with the break up of the company. Investors could see significant returns if it becomes apparent that the sum of Alibaba's parts is worth much more than the market implies the "entire company" is worth today.

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