Alibaba Earnings: Stock Dividend Distribution of the Cloud Business Is Good for Shareholders

Alibaba Stock at a Glance

• Fair Value Estimate: $177
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Alibaba Earnings Update

While Alibaba Group’s BABA adjusted earnings before interest, taxes, and amortization rose 60% year on year—15% higher than Refinitiv consensus—the share price fell 5% in U.S. trading on May 18.

We think the market reacted negatively because investments in users, a robust ecosystem, and technology in the China commerce business will likely cause declines in adjusted EBITA margin over the next three years, and the pace and magnitude of unlocking value missed expectations. The Alibaba International Digital Commerce Group, which contributes 10% to our sum-of-the-parts valuation, will raise external capital instead of going public in the foreseeable future.

Alibaba will fully spin off its Cloud Intelligence Group via a stock dividend to shareholders, and the company also plans to publicly list the group in the next 12 months. We think this will be a net positive for shareholders before the distribution of the stock dividend. But after that, some investors may keep the more promising cloud business shares while reducing their stakes in Alibaba Group, whose main business is the slowing Taobao/Tmall group.

Alibaba Stock Fair Value Estimate Held at $177

Our fair value estimate, driven by discounted cash flow valuation, remains at $177 per share. We believe the shares are undervalued for investors with a three- to five-year horizon, who can benefit as the restructuring unlocks value.

Before the stock dividend distribution, the cloud intelligence group will raise private capital to bring in strategic investors that could help grow the business and issue an employee stock ownership plan to the cloud intelligence group staff. This would lead to some dilution for Alibaba shareholders, although Alibaba’s capital management committee intends to keep it at a manageable level. The offset of the dilution is the potentially higher revaluation of the cloud business, which will be owned by Alibaba shareholders. We note that Alibaba Group is still half of our sum-of-the-parts valuation.

We forecast adjusted EBITA margin at the China commerce business to decline in the next three years due to investments. Alibaba will upgrade Taobao to a one-stop consumption and lifestyle platform, and attracting content is one of the methods. Alibaba is increasing the variety of supplies through supportive measures of small merchants. Merchant tools upgrade and rollout will allow Alibaba to attract and retain merchants.

From the end of the Lunar New Year to April, Alibaba saw positive year-on-year growth in users and gross merchandise volume on the Taobao app. We expect GMV to grow 4% year on year in the year ended March 2024. Customer management revenue declined 5% year on year in the quarter, in line with the mid-single-digit year-on-year decline in online physical goods GMV on Taobao and Tmall, excluding unpaid orders. We forecast GMV to grow in line with customer management revenue in the rest of the year ended March 2024, meaning monetization rate should be flat.

We see more plans to preserve synergies among the business groups amid the planned restructuring. Alibaba’s board of directors will approve business cooperation and data-sharing mechanisms within Alibaba Group. We estimate that the business groups are more likely than not to continue to provide services to each other.

We think returns to Alibaba Group shareholders could take the form of dividends as well as share buybacks in the future.