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Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

Alibaba Group Holding  / Equity Bottom-Up

Alibaba shares have significantly underperformed its peers over the last twelve months due both to the share overhang stemming from both China’s trade conflict with the US and internal risks related to China’s own anti-monopoly investigations as well as concerns over the cancellation of Ant Financial’s IPO. Its share price has partially recovered YTD as some of the share overhang concerns were allayed, but the share overhang lingers, in our view. However, in the current market where the majority of the tech stocks have nearly doubled or more in the last twelve months, we believe this underperformed stock offers an attractive risk-return proposition at current levels.  If the bulls were looking for an outstanding December quarter to trigger a rebound, it did not happen, even though the Dec quarter results were solid.  What we took away from the results is that the operating fundamentals are strong and there are positive signs of loss-making segments turning the corner:   <ul>
<li>Highest quarterly revenue growth in 2020 (37% YoY). </li>
<li>Historic high adjusted EBITA for Core Commerce and highest quarterly operating profit in history. </li>
<li>The cloud segment has turned profitable for the first time.</li>
<li>Cainiao has recorded positive operating cash flow. </li>
</ul>The key risk for the company is higher than expected margin erosion from investments in new businesses.

Alibaba shares have significantly underperformed its peers over the last twelve months due both to the share overhang stemming from both China’s trade conflict with the US and internal risks related to China’s own anti-monopoly investigations as well as concerns over the cancellation of Ant Financial’s IPO. Its share price has partially recovered YTD as some of the share overhang concerns were allayed, but the share overhang lingers, in our view. However, in the current market where the majority of the tech stocks have nearly doubled or more in the last twelve months, we believe this underperformed stock offers an attractive risk-return proposition at current levels.  If the bulls were looking for an outstanding December quarter to trigger a rebound, it did not happen, even though the Dec quarter results were solid.  What we took away from the results is that the operating fundamentals are strong and there are positive signs of loss-making segments turning the corner:   
Highest quarterly revenue growth in 2020 (37% YoY). 
Historic high adjusted EBITA for Core Commerce and highest quarterly operating profit in history. 
The cloud segment has turned profitable for the first time.
Cainiao has recorded positive operating cash flow. 
The key risk for the company is higher than expected margin erosion from investments in new businesses. 

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