Despite a pandemic ravaged year, Alibaba still managed to deliver a strong set of financial results. Now that the dust of the antitrust probe has finally settled, Alibaba’s shareholders have plenty to look forward to in the future.

  • Tan De Jun | Published on Jun 24, 2021

• In April 2021, Alibaba was handed a fine of USD 2.8 billion, marking the end of the antitrust probe that began in December last year.

• Despite facing numerous challenges, the company’s revenue grew to a record high of CNY 717 billion, 41% higher compared to the previous year.

• Alibaba Cloud delivered its second consecutive profitable quarter as demand for cloud services continues to be robust.

• Taobao Live continues to grow strong. Gross merchandise value generated by the segment in FY 2021 more than doubled compared to FY 2020. 

• Based on the sum-of-the-parts methodology, we arrive at a target price of USD 412 for Alibaba which translates to an upside potential of approximately 92%.

In its 22 years of existence, 2020 was probably the toughest one for Alibaba (NYSE:BABA). The COVID-19 pandemic, followed by the suspension of Ant Group’s IPO, and more recently, the antitrust investigation, are some of the major issues that have dampened investor sentiment, causing Alibaba’s shares to be range bound over this period, underperforming the rest of China’s tech sector (Figure 1).

But with the COVID-19 situation in China largely stabilised, and the antitrust investigation concluded, we think that the worst is behind, and Alibaba’s shareholders have plenty to look forward to in the future. 

Figure 1: Alibaba’s shares have traded sideways since the beginning of 2020

Antitrust probe concluded with a USD 2.8 billion fine

Late last year, China’s State Administration for Market Regulation announced a new set of rules targeting the use of monopolistic practices among big tech companies. Shortly after, it launched an investigation into Alibaba for its alleged use of such practices. 

Several months later, the investigation concluded with a USD 2.8 billion fine handed out to the company after it was found to have breached the country’s anti-monopoly law. Despite the record fine, investors breathed a sigh of relief as it was less severe than expected, roughly equivalent to 4% of Alibaba’s 2019 domestic sales, well below the maximum of 10% allowed under Chinese law. 

Alibaba has accepted the penalty without argument, and has pledged to ensure its compliance with the new rules going forward. This marks the end of the antitrust probe, and that the company can finally move on from this saga.

Even though tighter regulations might seem damaging for Alibaba, we do not think that investors should be overly concerned as the government has stressed that they are not meant to hamper the growth of tech companies, but rather to safeguard consumers, and to promote healthy competition and the sustainable growth of China’s technology sector in the long run.

With regards to Ant Group, the payments giant has reached a deal with the central bank, and will restructure as a financial holding company after regulators pulled the plug on its USD 34.5 billion mega IPO back in November last year. 

With this development, Ant Group will likely be subjected to greater regulatory oversight and capital requirements. Even though tighter regulation might seem like a negative, we believe that they are necessary given the company’s involvement in financial services, and its importance to China’s economy. The central bank has also hinted that an IPO could be on the cards again once Ant Group resolves its issues. 

Alibaba Cloud achieves its second consecutive profitable quarter

Despite facing numerous challenges throughout the year, the company as a whole still managed to deliver a record high revenue of CNY 717 billion in FY 2021, 41% higher than the previous year. Among Alibaba’s four business segments, cloud computing grew the fastest at a rate of 50% year-over-year (Table 1).

Table 1: Cloud computing is Alibaba’s fastest growing segment in FY 2021
(CNY millions)FY 2016FY 2017FY 2018FY 2019FY 2020FY 2021
Core Commerce92,335133,880214,020323,400436,104621,146
Cloud Computing3,0196,66313,39024,70240,01660,120
Digital Media and Entertainment3,97214,73319,56424,07726,94831,186
Innovation Initiatives and Others1,8172,9973,2924,6656,6434,837
Total101,143158,273250,266376,844509,711717,289
Source: Company DataData as of May 2021

More importantly, Alibaba Cloud achieved its second consecutive profitable quarter in 4Q FY21 (Figure 2), as demand for cloud services continues to be robust. According to data from Canalys, 2020 was a record breaking year for China’s cloud computing industry, as cloud spending grew by a massive 66% to USD 19 billion, up from USD 10.5 billion in 2019. 

Figure 2: Alibaba Cloud achieves its second consecutive profitable quarter in March

The sharp increase in cloud spending is partly due to the pandemic, which has driven up demand for online services, such as live streaming and e-commerce. Not only that, the massive wave of digital transformation happening across China has also contributed to the rising demand for cloud services. To capitalise on this opportunity, Alibaba has earmarked USD 1 billion for cloud investment over the next three years.

Looking ahead, we expect Alibaba, which holds a dominant position in the market, to be the prime beneficiary of China’s booming cloud computing industry. We strongly believe that in time to come, cloud computing will become a significant contributor to Alibaba’s bottom-line. 

Taobao Live continues to grow strong 

Besides cloud computing, Taobao Live is another up and coming segment of the company. Taobao Live is Alibaba’s dedicated live commerce platform. It combines live streaming with e-commerce to bring consumers a brand new interactive shopping experience like no other. 

Since its launch in 2016, Taobao Live has grown tremendously, and has played an important role in helping Alibaba maintain its crown as China’s leading e-commerce platform. 

Recently, the company reported that gross merchandise volume (GMV) generated by Taobao Live crossed CNY 400 billion mark in 2020, more than double compared to 2019 (Figure 3). Even so, Taobao Live only accounts for only about 5% of Alibaba’s total GMV, indicating that it still has plenty of room for further growth. 

Figure 3: Taobao Live’s GMV crossed the CNY 400 billion mark in 2020 

Besides the fact that many consumers have started to embrace this new method of shopping, Taobao Live’s spectacular growth is also partly driven by the pandemic. With most of China placed under lockdown in early 2020, many consumers turned to Taobao Live for their entertainment and shopping needs. As a result, the platform achieved strong growth in both user and merchant acquisition over the year. 

Between 2019 and 2020, the number of daily active users and live streamers on Taobao Live grew by 100% and 661% respectively. Given the rising popularity of live commerce among consumers, we believe that most, if not all brands, will eventually adopt live streaming as part of their marketing strategy, so as not to lose out to their rivals. 

Even though it is a relatively new and still small segment of the company, Taobao Live has shown great promise so far and we believe that it will one day become an important component of Alibaba’s new retail strategy. 

Recent sell-off has left Alibaba’s shares undervalued

Due to its recent troubles, Alibaba’s shares are currently trading at depressed prices. Based on our estimates, we think that at its current share price of USD 214, Alibaba (NYSE:BABA) is significantly undervalued, a result of market participants being overly pessimistic on the company.

Using the sum-of-the-parts valuation methodology, our estimated target price for Alibaba is USD 412, which translates to a potential upside of 92%.

With the conclusion of the antitrust probe and the restructuring of Ant Group, we think that the worst is behind for Alibaba. Moreover, taking into account the Alibaba’s dominant position within the cloud computing industry, as well as in the field of live commerce, we believe that the company is positioned to do well in the future. 

Investors who are interested in the long-term growth story of this company should consider taking a position now, especially when its shares are still undervalued. 

Table 3: Alibaba is expected to deliver strong earnings growth in the years ahead
FY 2021FY 2022FY 2023FY 2024
PE Ratio (X)27.122.218.414.5
Earnings Growth5.6%16.2%20.2%27.4%
EPS (USD)8.359.7111.6814.88
Source: Bloomberg Finance L.P.Data as of 23 June 2020
Figure 4: Alibaba’s share price vs. earnings per share