Alibaba Group Holding Limited (BABA) has been a subject of intense debate among investors. Despite facing regulatory headwinds and competition, a bullish thesis is gaining traction, focusing on the company’s fundamental strength and growth potential. This article, based on an analysis by Value Investigator on Modern Value Investing’s Substack, will delve into the core arguments supporting a positive outlook for BABA.
As of June 13th, Alibaba’s shares traded at $112.87, with trailing and forward P/E ratios of 15.15 and 11.34, respectively, according to Yahoo Finance. These figures suggest a potentially undervalued stock, especially when considering the intrinsic value of its various business segments. Let’s explore the key factors driving this bull case and what they mean for FYM News readers.
Taobao and Tmall Group (TTG): The E-commerce Powerhouse
At the heart of Alibaba’s valuation lies the Taobao and Tmall Group (TTG), China’s dominant e-commerce platform. Despite increasing competition, TTG maintains an impressive 44% EBITDA margin, demonstrating its robust cash-generating capabilities. This financial stability is a cornerstone of the bull case.
Even with a conservative assumption of 3% annual revenue growth—significantly below China’s nominal GDP trajectory—TTG is projected to generate RMB 150 billion in earnings over the next 12 months. Applying an 18x multiple to this base case yields a valuation of RMB 2700 billion (USD $376B), substantially exceeding Alibaba’s entire market capitalization of RMB 1953 billion (USD $272B). This discrepancy suggests that investors are undervaluing TTG.
Value Investigator notes, ‘The market is essentially giving away Alibaba’s other assets for free.’ This includes significant holdings like Ant Group, international commerce ventures, logistics operations, and the Cloud Intelligence Group. This undervaluation forms a key argument for the bull case, highlighting a potentially lucrative entry point for investors.
Cloud Intelligence Group: An Inflection Point
Alibaba’s Cloud Intelligence Group is experiencing a notable transformation. Historically, regulatory and cost barriers have hampered China’s cloud adoption. However, the rise of generative AI is creating a structural shift in demand, accelerating cloud adoption across various industries.
As the market leader with a 36% share, Alibaba Cloud is well-positioned to capitalize on this growing demand. Its deep integration across commerce, proprietary AI tools (Qwen LLMs), and a hyperscale GPU infrastructure provide a competitive edge. This segment is poised for substantial growth, adding significant value to Alibaba’s overall portfolio.
The Q1 FY25 results showcased this potential, with cloud revenue surging 18% year-over-year—the strongest growth rate since 2021. This growth is fueled by AI workloads and disciplined pricing strategies. With the market forecasted to grow at a 20% CAGR through 2030, Alibaba Cloud’s path to RMB 717 billion (~$100B) revenue by 2035 appears increasingly feasible, as suggested by industry analysts.
Undervaluation and Potential Upside
The undervaluation of Alibaba’s core e-commerce business, combined with the high-growth potential of its cloud segment, presents a compelling investment opportunity. Investors are effectively paying for TTG at a 28% discount while gaining exposure to other valuable assets at no additional cost.
Moreover, the optionality in cloud, AI, and fintech provides additional upside potential. As these sectors continue to evolve and mature, Alibaba is strategically positioned to benefit. This asymmetric opportunity is particularly attractive for long-term investors seeking growth and value.
Kontra Investments, in their March 2025 analysis, also highlighted a rebound in Taobao/Tmall and cloud growth amid rising AI demand. The consensus among analysts points to Alibaba’s robust fundamentals and strategic initiatives as key drivers for future growth, further solidifying the bull case.
Navigating the Risks
Investing in Alibaba is not without risks. Regulatory uncertainties in China, competitive pressures in the e-commerce and cloud sectors, and geopolitical factors all pose potential challenges. However, the company’s strong financial position and diversified business model help mitigate these risks.
Investors should carefully consider these factors and conduct thorough due diligence before making any investment decisions. A balanced approach, incorporating both the potential rewards and inherent risks, is essential for navigating the complexities of the Chinese market.
Implications for Investors
For long-term investors, Alibaba presents an appealing opportunity to gain exposure to the Chinese economy and the rapidly growing e-commerce and cloud computing sectors. The company’s undervaluation, strong fundamentals, and growth prospects make it a potentially rewarding investment.
However, investors should remain vigilant and closely monitor regulatory developments, competitive dynamics, and macroeconomic trends. A well-informed and disciplined approach is crucial for maximizing returns and managing risks in this dynamic market.
Final Thoughts
Alibaba Group Holding Limited (BABA) embodies a blend of robust core business operations and high-growth potential in emerging sectors like cloud computing and AI. The bull case, supported by a deep undervaluation of its core e-commerce business and the promising trajectory of its cloud segment, suggests a compelling opportunity for long-term investors.
While risks remain, Alibaba’s strategic positioning, financial strength, and diversified portfolio offer a degree of resilience. As China’s economy continues to evolve, Alibaba is poised to play a significant role, making it a noteworthy consideration for those seeking exposure to the region’s growth. Investors must weigh these factors carefully, ensuring their investment aligns with their risk tolerance and long-term objectives.
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