After a tough two years, Chinese e-commerce behemoth Alibaba Group Holding Limited (BABA) is rebounding this year, driven by China’s reopening after the lifting of COVID-19 restrictions and the possibility of regulatory scrutiny coming to an end. On July 7, a long-running regulatory crackdown on BABA’s financial arm Ant Group ended with a fine of 7.12 billion yuan ($985 million).

BABA owns about a 33% stake in Ant Group. Several recent signs have emerged, indicating that Ant has been on the right side of regulators. In January this year, the company received approval to expand its consumer finance business.

BABA has become the latest company to jump on the chatbot bandwagon. Last month, the Chinese tech giant launched an AI tool called Tongyi Wanxiang, which can generate images from prompts. Alibaba’s cloud division, which launched this product, said Tongyi Wanxiang is available for enterprise customers in China for beta testing.

“With the release of Tongyi Wanxiang, high-quality generative AI imagery will become more accessible, facilitating the development of innovative AI art and creative expressions for businesses across a wide range of sectors, including e-commerce, gaming, design and advertising,” Jingren Zhou, CTO of Alibaba Cloud Intelligence.

On April 2, Alibaba Cloud launched its latest large language model (LLM), Tongyi Qianwen. The company plans to integrate new LLM into all business applications across its ecosystem in the near future to enhance user experience further.

Moreover, the e-commerce major on March 28 announced its plans to split its business into six independent units in a move designed to unlock shareholder value and foster competitiveness. The six business clusters include Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, Global Digital Commerce Group, and Digital Media and Entertainment Group.

BABA is reorganizing its digital empire to adapt to the changes in the technology industry. “This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes,” said Daniel Zhang, BABA’s CEO, in an email to employees.

However, BABA’s underwhelming revenue growth for the fourth quarter of fiscal 2023 disappointed investors. The company posted revenue of 208.20 billion yuan ($30.12 billion) for the three months that ended in March 2023, compared with a Refinitiv consensus estimate of 210.30 billion yuan drawn from 26 analysts.

Despite missing analyst estimates, Alibaba posted a 2% increase in quarterly revenue, and its board approved a spin-off of its cloud-computing business.

Daniel Zhang stated in the company’s quarterly earnings release, “We are taking concrete steps towards unlocking value from our businesses and are pleased to announce that our board has approved a full spin-off of the Cloud Intelligence Group via a stock dividend distribution to shareholders, with intention for it to become an independent publicly listed company.”

Shares of BABA have gained 11.7% over the past month and 3.4% year-to-date to close the last trading session at $95.07.

Here is what could shape BABA’s performance in the near term:

Positive Recent Development

On May 25, Alibaba Cloud, BABA’s digital technology and intelligence backbone, and MongoDB, Inc. (MDB) announced a four-year extension to their strategic partnership that has witnessed significant growth since being announced in 2019. With this partnership, customers can easily adopt and consume MongoDB-as-a-service, ApsaraDB for MongoDB, from Alibaba Cloud’s data centers globally.

Robust Financials

BABA’s revenue increased 2% year-over-year to $30.32 billion for the fourth quarter that ended March 31, 2023. Its revenue from the International Commerce segment rose 29% from the year-ago value to $2.70 billion. Also, the company’s adjusted EBITDA came in at $4.68 billion, up 37.4% year-over-year.

Furthermore, BABA’s non-GAAP net income grew 38.3% year-over-year to $3.99 billion, and its non-GAAP earnings per share was $0.20, an increase of 35.4% year-over-year. In addition, the company’s cash inflows from operating activities came in at $4.57 billion for the quarter.

Solid Historical Growth

BABA’s revenue has grown at a 19.5% CAGR over the past three years. Over the same period, the company’s EBITDA and total assets have increased at 3.6% and 10.1% CAGRs, respectively.

Favorable Analyst Estimates

Analysts expect BABA’s revenue to increase 3.4% year-over-year to $31.48 billion for the fiscal 2024 first quarter that ended June 2023. The consensus EPS estimate of $2.02 for the to-be-reported quarter indicates a 16.5% year-over-year increase. Moreover, the company has surpassed the consensus EPS estimates in all four trailing quarters, which is impressive.

In addition, BABA’s revenue and EPS for the fiscal year (ending March 2024) are expected to increase 7.1% and 9.8% year-over-year to $132.28 billion and $8.51, respectively. Also, analysts expect the company’s revenue and EPS for the fiscal year 2025 to grow 9.4% and 11% year-over-year to $144.66 billion and $9.45, respectively.

High Profitability

BABA’s trailing-12-month gross profit margin of 36.85% is 4.4% higher than the 35.30% industry average. The stock’s 17.62% trailing-12-month EBITDA margin is 65.4% higher than the industry average of 10.65%. Moreover, its trailing-12-month net income margin of 8.38% is 95.9% higher than the industry average of 4.28%.

Additionally, the stock’s trailing-12-month levered FCF margin of 13.06% is 206.2% higher than the industry average of 4.27%. Also, its trailing-12-month CAPEX/Sales of 3.95% compares with the 3.25% industry average.

POWR Ratings Show Promise

BABA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BABA has a grade of B for Sentiment, consistent with its optimistic analyst expectations. Also, the stock has a B grade for Quality, in sync with its higher-than-industry profitability.

BABA is ranked #21 of 45 stocks in the B-rated China industry.

Beyond what I have stated above, we have also given BABA grades for Value, Growth, Stability, and Momentum. Get access to all BABA ratings here.

Bottom Line

BABA’s stock is currently trading above its 50-day and 200-day trading averages of $88.68 and $89.69, respectively, indicating an uptrend. After struggling for over two years, Alibaba stock is soaring significantly this year as regulatory concerns fade and China’s economy rebounds.

Moreover, after reporting strong fourth-quarter earnings, the Chinese e-commerce giant is expected to maintain its business momentum this year and beyond, driven by new product launches, strategic partnerships, and investments.

Given BABA’s solid financial performance, favorable analyst estimates, and robust profitability, we think investing in this Chinese tech stock could be wise now.

How Does Alibaba Group Holding Limited (BABA) Stack up Against Its Peers?

BABA has an overall POWR Rating of B. One could also check out these other Chinese stocks with an A (Strong Buy) rating: NetEase Inc. (NTES), China Automotive Systems, Inc. (CAAS), and Tarena International, Inc. (TEDU).

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BABA shares rose $0.76 (+0.80%) in premarket trading Thursday. Year-to-date, BABA has gained 7.92%, versus a 18.59% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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