2. Alibaba Group Holding Ltd. (NYSE:BABA)
Number of Hedge Funds: 91
Alibaba Group Holding Ltd. (NYSE:BABA) is a technology company specializing in e-commerce, retail, Internet, and technology. It operates in sectors like retail, cloud computing, fintech, and logistics. It has also made significant investments in other technology companies and has a substantial presence in the global market.
The company has been at the forefront of AI technology for years, utilizing AI chatbots and investing heavily in its cloud business. The cloud segment uses AI to provide personalized suggestions and is developing a powerful large language model, Qwen 2.0. The positive growth of its AI cloud platform demonstrates strong user adoption. It has also recently launched around 100 new open-source AI models.
It offers various e-commerce platforms, including wholesale (1688.com, Alibaba.com), retail (AliExpress), and regional marketplaces (Lazada, Trendyol, Daraz). It generates revenue through commissions and has a dominant market share in China, accounting for 40% of the total e-commerce GMV.
Alibaba Group Holding Ltd. (NYSE:BABA) reported a 4.59% increase in revenue for FQ1 2025. The e-commerce business grew by 4%, with international ventures like Lazada and AliExpress experiencing a 32% surge in sales. The cloud division saw a 6% increase in revenue, and AI-related products achieved a remarkable 155% year-over-year growth.
The company is driving growth in the competitive e-commerce market through its innovation. Its recent fee increase announcement has positively impacted market sentiment. With a rapidly expanding market, it is well-positioned for long-term growth due to its competitive advantage and strong brand.
O’keefe Stevens Advisory stated the following regarding Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter:
“We initiated two new positions during the quarter: Alibaba Group Holding Limited (NYSE:BABA) and Perrigo (PRGO). Both have seen their stocks decline over 70%+ from their all-time highs.
Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025.
It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23…” (Click here to read the full text)
