Alibaba Group Holding Ltd. (BABA, Financial) is proving to be more than just an online marketplace. With its ever-evolving ecosystem, expansive reach across global shores and a calculated approach to diversification, Alibaba is setting the stage for a digital revolution.
From its ventures into the global arena with the Alibaba International Digital Commerce Group to the artificial intelligence-powered future it envisions, Alibaba paints a picture of strategic diversification and broadening horizons.
A broader ecosystem, international reach and strategic diversification
Alibaba's user-centric strategy, epitomized by the Taobao app, has yielded substantial user growth and engagement. The key metrics reflecting this advantage include the rapid growth in daily active users, which surged by 6% or more year over year, with July witnessing a staggering 7% increase.
This upswing in DAUs highlights the app's popularity and underscores its sustainability and capacity to draw and retain users over the long haul. As affirmed by third-party data, the widening DAU leadership in the e-commerce space bolsters Alibaba's standing as a go-to platform for consumers. As more users opt for the Taobao app, Alibaba's ecosystem gains strength, setting the stage for a myriad of opportunities in the digital economy.
Additionally, Alibaba's "value-for-money battle" has emerged as a cornerstone of its strategy, attracting new merchants to the platform. During the June quarter, the company successfully onboarded a substantial number of new merchants. A significant portion of these newcomers swiftly joined the value-for-money battle, effectively winning over and converting users.
Notably, this development attests to the platform's growing appeal among merchants, who increasingly gravitate toward Alibaba as their preferred choice for stable business operations. Merchant confidence in doing business on the Alibaba platform has surged, reflected in a remarkable uptick of over 20% in the daily average number of merchants actively investing in advertising.
The symbiotic relationship between user growth and merchant expansion establishes a virtuous cycle on Taobao and Tmall, where the merchant ecosystem, revenue growth, heightened profitability and Alibaba's core mission all converge. By infusing AI into its platform, Alibaba aims to transform the Taobao app into a comprehensive smart portal underpinned by AI, catering to the diverse needs of its colossal user base, which exceeds 1 billion.
Similarly, Alibaba's leads into international markets, spearheaded by the Alibaba International Digital Commerce Group, underscore its ambition for global relevance. AIDC's impressive revenue growth of 41% bears testimony to the success of this expansion.
The retail business within AIDC experienced remarkable growth, recording a 60% year-over-year surge in revenue. This growth was driven by robust order volumes on international retail platforms, which indicate a promising trajectory in high-priority markets such as the Philippines and Thailand. Alibaba's emphasis on improving monetization and operating efficiency bolsters its international expansion efforts.
While facing challenges related to shifting demand patterns, Alibaba Cloud continues to chart a path toward long-term growth. The company recognizes the immense potential of AI services and has witnessed strong demand for model training and related AI services on its cloud infrastructure.
The belief that AI represents the future underscores Alibaba Cloud's commitment to providing a full spectrum of AI-related services across various layers. This approach sets the stage for capturing the burgeoning AI opportunity to reshape industries over the long term. Alibaba Cloud's robust financial performance, as indicated by its adjusted Ebitda growth of 106%, underscores its growth potential.
Source: Earnings presentation
Finally, Alibaba's Digital Media Entertainment business group has achieved impressive revenue growth of 36% year over year and recorded its first-ever profitable quarter. This milestone was accomplished through a combination of factors, including decreased growth in subscription revenue and higher revenue contributions from offline shows and cinema. As the company continues to improve its content production capabilities and enhance content creation and distribution, the DME segment may significantly support its overall profitability.
A tale of undervaluation, premiums and investment opportunities
Currently, the stock is priced at $86.8, which is a bit of a steal compared to its intrinsic fair value of $123.44. When you look at its price-earnings ratio 18.79, it is evident that shares are going for a song compared to what it is earning. With a price-sales ratio of 1.78, the stock's price aligns with its sales. However, the PEG ratio of 17.08 gives us a little pause, hinting the stock might be priced a tad high considering its future earnings growth.
Looking at the stock's stats over the last five and 10 years, we see it boasting lower price-earnings, price-sales and enterprise value/Ebitda ratios than usual, suggesting investors are getting a bit of a discount compared to its good old days. To sum up, it feels like Alibaba is going for less than it is worth, trading lower than its past figures and those of its industry peers, implying an undervaluation.
Takeaway
Even though Alibaba's cloud and media entertainment sectors showcase promising growth trajectories, its stock is a potential gem for investors, trading below its intrinsic value and historical averages. In essence, the company is crafting a grand ecosystem that seems inviting for investors with an eye on value and growth.
