Alibaba (BABA) has faced years of underwhelming stock performance fueled by regulatory challenges and macroeconomic pressures. In its most recent results, the company showed weakening revenue growth and declining earnings, further intensifying the pessimistic sentiment around the stock. Still, Alibaba’s management has been aggressively buying back shares, which could signal a turning point, particularly given that shares continue to trade at a rather depressed valuation. Therefore, I am bullish on the stock.
Alibaba’s Sluggish Revenue and Earnings
Alibaba’s most recent Q1 results for Fiscal 2025 weren’t impressive and reflected ongoing challenges with the e-commerce and cloud giant’s revenue growth losing momentum. However, my bullish position stems from other factors which I’ll elaborate further in this article, for now, let’s examine Alibaba’s financials.
In Q1 total revenue for the quarter reached $33.47 billion, an increase of just 3.9% year-over-year. This result marked a sharp slowdown compared to last year’s 13.9% growth and the more modest but still more substantial 6.6% increase from the previous quarter.
Alibaba’s growth in the quarter was driven by its international commerce business and cloud division. However, the company’s core domestic commerce segment – Taobao and Tmall – saw a slight revenue decline. Specifically, sales from the China commerce retail segment dropped by 2% to roughly $14.8 billion.
A reduction in direct sales initiatives weighed on this decline. While customer management revenue increased by 1%, this was offset by a decrease in the company’s take rate – the percentage Alibaba earns from transactions on its platforms.
Earnings further reflected the company’s ongoing struggles, with adjusted net income declining 9% year-over-year to $5.6 billion. Despite improving operational efficiency, Alibaba’s operating margin fell from 18% to 15% due to increased investments in its core e-commerce platforms and international expansion initiatives. The decline was also compounded by the growing costs associated with scaling up its cloud and logistics businesses, which are critical to Alibaba’s long-term growth strategy but currently operate at slimmer margins.
Surging Buybacks: A Potential Bullish Catalyst
Although Alibaba’s recent results were somewhat lackluster, partially explaining the ongoing pessimism surrounding the stock, the company’s aggressive share buybacks could serve as a potential bullish catalyst. This forms the basis of my own optimistic outlook on the stock.
Specifically, during the quarter, Alibaba repurchased 613 million ordinary shares for $5.8 billion, bringing the total amount spent on buybacks over the past 12 months to $18.1 billion. This implies a buyback yield of 9.4% at the stock’s current market capitalization. Such an aggressive repurchase momentum highlights its management’s confidence in the company’s long-term value, even as its share price languishes.
Moreover, since buybacks are not commonly employed by Chinese companies, Alibaba’s bold repurchase strategy highlights management’s recognition that buying back shares at current valuation levels is likely to prove quite accretive to the company’s per-share metrics in the future. Sure, Alibaba’s latest numbers were not too pretty, but the company remains a cash cow in relative terms.
To elaborate further, Alibaba is still expected to achieve a free cash flow of $21.7 billion this year (Fiscal 2025). Wall Street expects that free cash flow will then jump to $25.2 billion in the following year, with capital expenditures likely set to moderate. These projections translate to a present and forward P/FCF ratio of 8.9 and 7.6, respectively, indicating depressed valuation levels, even for a company experiencing slower growth.
Therefore, given that a substantial portion of this free cash flow is channeled to repurchase shares at attractive prices, with a buyback yield nearing double digits, I believe that Alibaba’s investment case presents a strong margin of safety and considerable upside potential at its current valuation.
Another important factor to note is Alibaba’s growing dividend payments, which, along with the underlying buyback yield, form a double-digit shareholder yield at the stock’s current levels.
Is BABA Stock a Buy, According to Analysts?
Examining Wall Street’s view on BABA stock, we see a Strong Buy consensus rating based on 13 Buys and three Holds assigned in the past three months. At $109.53, the average Alibaba stock forecast suggests a 34.92% upside potential.
If you’re uncertain which analyst to follow for buying and selling BABA stock, consider Rob Sanderson from Loop Capital Markets, a five-star analyst according to Tipranks’ ratings. Over the past year, he has been the most accurate analyst covering this stock, delivering an average return of 12.21% per rating with a 57% success rate. Click on the image below to learn more.
Takeaway
To summarize the bullish statement, Alibaba’s struggles with revenue growth and dipping earnings have dampened sentiment, but its aggressive share buybacks signal management’s confidence in the company’s long-term value. With strong free cash flow and a depressed valuation, the stock presents a compelling opportunity at its current levels. The ongoing buybacks should support the share price and enhance per-share metrics, providing a margin of safety and the potential for accretive EPS growth.
For this reason, I remain optimistic about Alibaba’s investment despite its prolonged underperformance.
