Long Position - Alibaba

Company Overview

Alibaba Group is China’s largest e-commerce and cloud computing company, operating a diversified digital ecosystem across commerce, technology, logistics, and financial services. The company serves over 900 million annual active consumers in China and approximately 1.3 billion globally, positioning it as a core infrastructure provider in the global digital economy.

Key Business Segments

• E-Commerce: Taobao and Tmall collectively dominate China’s online retail market with over 50% market share, driven by a high-margin, fee-based marketplace model.
• Cloud Computing: Alibaba Cloud (AliCloud) is the market leader in China with approximately 40% market share, positioning Alibaba as a long-term player in AI, data infrastructure, and enterprise technology.
• International Commerce: Platforms such as Lazada, Trendyol, and AliExpress drive international expansion, particularly in high-growth emerging markets.
• Logistics & FinTech: Cainiao and Ant Group provide logistics infrastructure and financial services, offering additional monetization avenues and potential IPO catalysts.

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Investment Rationale

Extreme Valuation Discount

Alibaba trades at historically depressed valuation multiples, well below both U.S. and Chinese technology peers. This discount reflects macroeconomic and regulatory concerns rather than deterioration in core business fundamentals.

Strong Free Cash Flow Generation

In 2023, Alibaba generated approximately $23 billion in free cash flow, translating to an FCF yield exceeding 10%. This places Alibaba among the most undervalued large-cap technology companies globally on a cash flow basis.

Growth in Cloud and International Businesses

AliCloud and international e-commerce platforms are expanding rapidly, diversifying Alibaba’s revenue base beyond China’s domestic economy and providing long-term growth optionality.

Regulatory Easing and Corporate Restructuring

Chinese regulatory pressure has eased meaningfully relative to prior years. Alibaba’s corporate restructuring and increased operational focus allow management to prioritize efficiency, profitability, and shareholder value creation.

Value-Unlocking Catalysts

Potential spinoffs or IPOs of AliCloud, Cainiao, and other segments could unlock significant hidden value currently not reflected in Alibaba’s consolidated valuation.

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Valuation Comparison

Alibaba is deeply undervalued relative to both U.S. and Chinese peers, trading at less than half the P/E and EV/EBITDA multiples of comparable companies such as Amazon, Tencent, and PDD Holdings.

Peer Comparison

• Alibaba (BABA)

  • Market Cap ($B): 190
  • EV/EBITDA: 7.5x
  • P/E Ratio: 9.8x
  • FCF Yield: 10.4%

• Amazon (AMZN)

  • Market Cap ($B): 1,700
  • EV/EBITDA: 16.2x
  • P/E Ratio: 40.5x
  • FCF Yield: 2.5%

• JD.com (JD)

  • Market Cap ($B): 70
  • EV/EBITDA: 9.3x
  • P/E Ratio: 12.5x
  • FCF Yield: 5.2%

• Tencent (TCEHY)

  • Market Cap ($B): 410
  • EV/EBITDA: 17.4x
  • P/E Ratio: 22.1x
  • FCF Yield: 4.6%

• PDD Holdings (PDD)

  • Market Cap ($B): 180
  • EV/EBITDA: 12.1x
  • P/E Ratio: 18.6x
  • FCF Yield: 3.8%

Key Observations:

• Alibaba trades at a 50%+ discount to peers on both P/E and EV/EBITDA.
• Its 10.4% FCF yield far exceeds global technology benchmarks.
• Market sentiment, rather than fundamentals, is driving valuation dislocation.

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Revenue Stability and Business Resilience

Alibaba’s diversified revenue streams provide resilience across economic cycles.

Drivers of Stability

• Fee-Based Marketplace Model: Unlike Amazon’s inventory-heavy approach, Alibaba earns high-margin commissions, resulting in consistent cash flow.
• AliCloud as China’s AWS: Dominant market share and recurring enterprise revenue mirror AWS’s role within Amazon.
• International Diversification: Overseas platforms reduce reliance on domestic Chinese consumption trends.
• Post-Regulatory Stability: Having absorbed regulatory pressure earlier than Western peers, Alibaba now operates in a more predictable policy environment.

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Risks and Catalysts

Key Risks

• China Macroeconomic Slowdown: Weak consumer sentiment could affect transaction volumes.
• Geopolitical Tensions: U.S.–China relations and ADR-related risks remain an overhang.
• Competitive Pressure: JD.com, PDD, and other players continue to compete aggressively on price and logistics.

Potential Catalysts

• IPO of Cainiao or AliCloud: Unlocking embedded asset value.
• Share Buybacks: Alibaba’s $25B buyback authorization provides downside support.
• Cloud and AI Expansion: Enterprise adoption and AI-driven services could reaccelerate growth.

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Conclusion

Alibaba represents a highly asymmetric risk-reward opportunity. The market continues to significantly undervalue its dominant competitive position, durable free cash flow generation, and long-term growth potential. With multiple catalysts for re-rating and meaningful downside protection from cash flows and balance sheet strength, a long position in Alibaba Group offers compelling upside in 2024.