Is Alibaba Going Out of Business?Apr 06, 2023
Price Target: Unlock 🔐
Target Date: Unlock 🔐
Stock: Alibaba ($BABA)
If there's one thing we love about 2023, it's the surprising amount of shareholder value being created out of spun companies.
One of our biggest successes for 2023 so far has been the wildly successful spin of GE Healthcare off of the GE brand (not to mention next year's really enticing GE Aerospace spin).
Frankly, consolidation in the tech space only really made sense in the free-money environment of the 2010s.
And this is especially true in China, where companies that get too powerful find themselves getting absolutely railroaded by the Chinese Communist Party.
That's why Alibaba ($BABA) has been allowed to languish under the weight of government pressure for the last few years despite incredible growth on their end.
But now the stock is approaching a breakout after last week's WILD announcement that Alibaba was going to break up into 6 different entities, most of which is free to raise capital or IPO as they see fit.
We'll get into the details of these splits in the main post, but up top this is a massive split that will accomplish two things:
It will allow more profitable arms of Alibaba to achieve escape velocity and grow like crazy
These smaller businesses will have a much easier time dodging regulatory pressure, as the Chinese government is simply trying to keep individual companies from garnering too much power.
Even outside the Chinese system, company spins like this tend to create value.
And since current Alibaba shareholders will capture upside from all these new ventures once the breakup happens, It's a great time to re-establish a price target for Alibaba.
There's a lot of growth that can happen from here, so let's dive into the details. 👇
Alibaba's Strong 2022:
Our central thesis here is that Alibaba is being really unfairly undervalued despite how strong its business is.
At first, our analysts figured this was entirely due to fears in the Western markets, but it definitely looks like regulatory pressure has also unfairly weighed on Alibaba throughout the past few years.
Despite this, Alibaba's recent earnings call came back with some strong results. They managed to grow revenue decently while maintaining a pretty strong 13% profit margin.
Obviously, those numbers can go up as COVID restrictions continue to wane, but we like where the business is currently.
The big news though is how Alibaba will circumvent that government pressure and international concern in one bold move:
Alibaba's Big Split:
So BABA is gearing up to break into 6 independent entities, as follows:
Cloud Intelligence Group: responsible for Alibaba's cloud services which have been potentially undervalued the most as a part of the larger Alibaba conglomerate.
Taobao T-mall Commerce Group: focusing on Alibaba's core business of Chinese commerce. This is the one business that will stay underneath the current Alibaba corporate structure and will not be able to establish its own board of directors.
Local Services Group: focusing on smaller services like food delivery and local vouchers (which are popular in China)
Cainiao Smart Logistics Group: think Amazon logistics but with more technology behind it.
Global Digital Commerce Group: which is one of the fastest growing segments at Alibaba -- with their sites set on internationally growing their e-commerce operations.
Digital Media and Entertainment Group: one of the smallest divisions at Alibaba with potentially the most upside.
The thing about operating a wide conglomerate like this is that it only works if each of your operations is creating efficiencies for the other.
Amazon worked so well in the 2010s because AWS was insanely profitable AND created efficiencies for their e-commerce business.
Now, maybe this is happening at Alibaba, but the share price is not reflecting that.
Instead, all being a conglomerate has done is put a LOT of pressure on Alibaba to perform, as well as drag them through a lot of regulatory headaches.
Because when you're a large business like this, profit and growth are everything. So you're usually only valued as much as your weakest business.
We like this split because it will allow things like Cloud Intelligence and Chinese commerce to pop off while the smaller divisions can grow at their own pace and achieve their own valuation.
Furthermore, all of these divisions (except Chinese Commerce) can appoint their own CEOs and raise capital in a way that best fits their mandates.
On a surface level, we're the most bullish on the Cloud Intelligence Group and the Local Services Group.
We've talked a LOT before about why we're so bullish on the cloud as a category, and even if cloud spend is declining worldwide, Alibaba's cloud division is WILDLY undervalued compared to the local market.
Meanwhile, BABA's local services group has robust competitors that are more fairly valued by the market.
This gives us an opportunity to see just how undervalued their local services group has been.
That comparison makes us more bullish about their ability to compete and find their level than any other division currently.
However, we won't start rating each individual group until well after the actual split.
All in all, this split is a huge value-creation opportunity.
Current BABA shareholders will get access to all this upside once this spin is fully realized in the next few months.
The stock is already up decently after this news broke.
Efficiency and agility are critical needs in a market this volatile.
This is a brilliant move on the part of Alibaba's leadership that allows them to move better with the economic moment and end a lot of the regulatory weight that's been holding their valuation down.
After the split, we'll monitor each company for winners and losers and refine our price target to the standouts.
We're really excited to see where they take this from here.
Risk/Reward: Medium-High / Very High
Dividend Yield: 0%
Market Cap: $261B