2. Alibaba Group Holding Limited (NYSE:BABA)
FWD PE Ratio: 12.02
1-Month Stock Price Performance: 32.47%
Number of Hedge Fund Holders: 91
Alibaba Group Holding Limited (NYSE:BABA) is a major Chinese multinational company that excels in various sectors, including e-commerce, retail, internet services, and technology. Its extensive portfolio features popular platforms such as Taobao and Tmall, which are central to its e-commerce operations, alongside Alimama, the company’s in-house monetization service.
It also facilitates online wholesale through sites like 1688.com and Alibaba.com, as well as AliExpress, its international retail marketplace. Additional offerings include Lazada, Trendyol, and Daraz, which expands its reach across Southeast Asia, and Freshippo, a grocery retail platform.
With Tmall Global catering to import needs, the company generates revenue primarily through fees and commissions from merchants using these platforms, it has taken over an impressive 40% share of China’s total e-commerce gross merchandise value (GMV) and has a vast active user base of 930 million as of 2023.
A significant area of growth for the company has been in AI. It has been actively integrating AI into its services, utilizing features like automated replies and chatbots to assist merchants in delivering better customer service.
The AI tools are invaluable, offering 24/7 availability to address common inquiries, which is particularly useful during off-hours. As consumer shopping behavior shifts towards more personalized experiences, Alibaba’s (NYSE:BABA) AI capabilities enable more accurate product recommendations, which can lead to improved sales conversions and enhanced customer engagement.
Its ambition in the AI space extends beyond basic customer service applications. Recently, the company has made strides in developing its own large language models (LLMs), in which it has experienced a remarkable increase in AI-related revenue, which has increased by triple digits.
Recognizing the demand for AI innovation, the company has released over 100 new open-source AI models that cater to diverse applications, including language processing, audio, visual comprehension, and coding. One of the advancements is a new text-to-video model that allows users to convert images into videos simply by typing prompts, which creates new creative possibilities for users.
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)
