Even Under Conservative Estimates, Alibaba Is A Steal (Rating Upgrade)

Core Viewpoint - Alibaba's Q1 earnings report shows mixed results, with a slight revenue growth but a decline in earnings per share, leading to an upgrade in investment rating to Strong Buy due to long-term potential [2][3][11] Financial Performance - Q1 revenue reached $33.47 billion, reflecting a 4% year-over-year growth, but fell short of consensus by $685 million [3] - Adjusted earnings per ADS were $2.29, down 5% year-over-year, yet exceeded consensus estimates by $0.20 [3] - Operating income decreased by 15% due to a reversal of share-based compensation expenses, while the bottom line saw a 27% decline due to reduced operational income and increased investment impairments [3] - The company holds approximately $63 billion in cash and equivalents against $25 billion in long-term debt, indicating a strong financial position with an interest coverage ratio of around 18x [3][7] Market Position and Growth Potential - Alibaba Cloud holds over a third of the Chinese cloud infrastructure market, despite facing competition from local providers and the big three global players [4] - The company is investing heavily in cloud services and AI, with a significant 56% year-over-year decrease in free cash flow attributed to increased expenditures in Aliyun [5] - The cloud segment's EBITA increased by 155% year-over-year, indicating improved efficiency and profitability potential [5] Strategic Initiatives - Alibaba is expanding its global reach, particularly in logistics and AI, although profitability in these segments is not expected in the near term due to ongoing investments [6] - The company is positioning itself as a major cloud service provider for high-profile events, such as the Olympic Games, which may enhance its global visibility and competitiveness [5] Valuation Insights - Conservative revenue growth estimates project a CAGR of around 6% over the next decade, reflecting a cautious outlook compared to historical growth rates [8] - Analysts expect earnings per ADS to reach $8.78, translating to approximately 2% growth year-over-year, with margins held constant for conservative modeling [9] - The intrinsic value of Alibaba shares is estimated at around $109, indicating that the stock is currently trading at a discount to its fair value [9]