In 2023, Ali has been short of big news, the group split, the change of leadership, the adjustment of the business leader, the issuance of the first dividend of 2.5 billion US dollars in the company's history, large repurchases, etc., interspersed with the obstruction and postponement of the original business IPO, etc., coupled with the latest news about the business to be the first, each of which can shock the jaws of the viewers.
Objectively speaking, Ali's series of changes are still dominated by positive factors, such as splitting can improve the operating efficiency of each business, especially without the support of the parent company, each business will be completely pushed into the cruel market, is the mule is a horse to be pulled out for a walk, and such as the buyback and dividend policy (as well as the recent increase in Ma Yun and Tsai Chongxin), which is obviously also to show favor to the capital market, but the current results are not satisfactory, Ali's share price has not yet come out of the trough, Therefore, there are also quite doubts in the market about Ali's hard work and reform.
Now that Alibaba's valuation is already undervalued (TTM P/E is less than 15 times), what signal is the market waiting for?
The core point of this article:
First, in the past year, Alibaba's management has corrected the deviation of the previous "top" expansion, selling assets and repurchasing from new strategies, and its practices and concepts are positive;
Second, the strategy is redetermined, the effect is still lagging, and Taotian's performance in 2024 is very important;
Third, to judge Ali's good or negative, the main reference efficiency index on the business side.
Necessary conditions for the inflection point: deal with non-core business and Taotian**
Let's first judge whether the market has captured a series of measures by Alibaba in the past year, as shown in the chart below.
The Golden Dragon Index includes major Chinese companies listed in the United States, which we regard as "**** Most of the time, Ali and ** have maintained a relatively consistent trend, and Ali's rise and fall at this time reflects more systemic risks or positives."
There are many exceptions, such as Ali's first announcement of the "split plan" in March 2023, when the stock price has been significantly pulled, and the market regards it as a big positive. In November 2023, Alibaba announced that Alibaba Cloud would suspend its IPO, and the above expectations were disappointed.
Recently, Tsai Chongxin and Ma Yun respectively increased their holdings of Ali's shares, and the market sentiment was further corrected, and Ali re-interacted with ** at the same frequency.
Most of Alibaba's various initiatives have been captured and fed back by the market, in other wordsAlthough the absolute value of Ali's stock price is still undervalued, if there is no "goodwill" mentioned at the beginning, Ali's stock price may be lower now, but from a long-term perspective, the market has not yet waited for a clear signal.
So what exactly is the market waiting for?
Value investors believe that enterprises have "intrinsic value", and the valuation of the secondary market will fluctuate around the "intrinsic value", generally speaking, the DCF valuation model (discounted free cash flow model) is often used for mature companies, we may as well judge the valuation inflection point of Alibaba, the principle of the model is to discount the free cash flow generated by the enterprise, and use it as the basis for valuation (generating free cash flow is an important goal of business operation).
The numerator is "free cash flow" (operating cash flow - capital expenditure) and the denominator is the discount rate, the former is very important for the company.
In Ali's most advanced period, it can basically be "more gold and more profit", operating cash flow is growing exponentially, and corporate profits are also rising all the way. In the face of the optimistic situation at that time, in order to extend the growth period and open the "second curve", Alibaba adopted an active expansion strategy and built a business ecological empire with massive cash flow as a bargaining chip.
The difference between the two lines in the chart above is the scale of capital expenditure, which will be significantly larger from 2027 onwards. Nowadays, there are quite a few opinions in the market that have a completely negative attitude towards Alibaba's expansion strategy, believing that the company should have been centered on e-commerce in the first place, and we don't think so
First, when the market is booming, the investment business is likely to generate better returns, and the investment expansion strategy itself is not wrong.
Second, the biggest problem with Alibaba's expansion is that it exceeds the boundaries of its capabilities, and the rapid progress of e-commerce to traditional retail and entertainment and other fields makes the company lag behind in talent training and concept iterationIn some areas, practical new solutions have not been proposed, which makes efficiency lag behind, and losses become a drag;
Third, 2020 (fiscal year 2021) can be called the highlight moment of Alibaba, the two broken lines hit a new high in that year, and then with the macroeconomic adjustment, coupled with the cornerstone business's domestic e-commerce business suffered from the general trend of consumption downgrade, the cash flow glory is no longer what it used to be, and the disadvantages of the investment business also began to break out at this time, such as the offline retailer supermarket business began to lose money.
From a free cash flow perspectiveWhat Ali needs most now is to open source and throttle, stabilize the Taotian business that is still a cash cow, and shut down and transfer the business with high-intensity cash consumption, or even **, which is a necessary condition for the inflection point.
At the 2023 Q4 analyst meeting, Ali's management said:
1) We still have some traditional brick-and-mortar retail businesses on our balance sheet, which are not our core focus. It is also very reasonable if you can complete the exit.
2) It will focus on core business investments, one of which is e-commerce business, including domestic and overseas e-commerce, and the second is cloud computing.
These are basically responses to the recent viral rumors that Ali wants ** assets:The sale of assets is indeed going on, and it is a matter of time or time.
The management, who has been active in the investment field for many years, naturally understands the main reason for the current sluggish market value of AlibabaThe irrational expansion of the business has become a burden for enterprises and a black hole for valuation. In 2023, we will strive to adjust the pace and hope to bring the company back to the trajectory of focusing on the core.
Now that the sale of assets is on the way, the next thing to focus on is the recovery of the "money-making ability" of the core business. In 2023, Alibaba Cloud will adjust its operating rhythm and no longer pursue growth at the expense of efficiency (hybrid cloud and customization-based private cloud business will be reduced, and public cloud will be redefined as the top priority), which is also in line with the group's strategy.
In the wait-and-see stage, it is Taotian, and in 2023, it will "return to the **" Double 11 of that year to re-offer the banner of the lowest price, which has indeed aroused the market's interest in Alibaba's cornerstone business (the growth of customer management revenue in 2024 is likely to be positive, while the same period last year is negative), raising business expectations, but on the other hand, from the perspective of financial reports, it needs to face some pressure in the short term.
Since the monetization rate of ** is lower than that of Tmall, when the business priority returns, part of the monetization rate will have to be sacrificed. In Q4 2023, Taotian's GMV will be positive, but the customer management revenue will remain unchanged year-on-year, which is obviously the "price" after the focus switch.
If the expectation of selling assets is very clear and can be called a good thing, then the real good for Alibaba is that Taotian's business can usher in a new inflection point in 2024:Both total GMV and customer management revenue continued to growIn other words, the growth rate of GMV is greater than the "profit margin" after focusing on **, which puts forward higher requirements for the former.
The buyback and dividend policy originated from the "** movement".
In the general expression, I always like to regard the cash scale on the company's books as a big benefit, and I always like to talk about cash reserves when explaining my own advantages.
It is true that the larger the cash scale, the stronger the company's ability to resist risks and the less likely it is to fall into short-term liquidity problems, but is the more cash the better? Again, the answer is no.
At the 2023 Q4 analyst meeting, Ali's management said:
As a listed company, it is necessary to show investors and shareholders a good return on capital. As a result, Alibaba announced last quarter that it would gradually increase its return on capital from single digits to double digits.
This is the second consecutive quarter that the emphasis has been on improving the return on capital (ROIC), which is the ratio of invested or used funds to the relevant returns, and its formula is: Return on Capital = (Net Income - Taxes) (Shareholders' Equity + Interest-bearing Liabilities) = (Net Income - Taxes) (Total Capital Total Assets - Excess Cash - Non-Interest Current Liabilities).
The reason why the above formula excludes "excess cash" is that this part of the cash has nothing to do with the normal operation of the enterprise (the part of the cash in excess of normal operations), which also emphasizes that the return on capital is a measure of "the ability of the enterprise to actually invest capital to generate returns", and the excess cash does not generate any value within this analytical framework.
In the expansion cycle of the company, profit creation still relies on the e-commerce business, but the capital investment has increased sharply, the excess cash has decreased, and the ROIC has declined, and the above chart has faithfully reflected the past history. In the new stage of enterprise development, from the perspective of efficiency optimization, enterprises need:
1) Reduce the scale of capital investment;
2) If there is too much "excess cash" on the books, and the funds themselves cannot generate value, it is better to directly return them to shareholders, such as repurchase can reduce "shareholder equity", which not only optimizes ROIC but also improves shareholders' sense of gain.
In addition, since "excess cash" does not generate value on its own, an excess of the book can affect ROE (Return on Net Assets).When companies stop expanding blindly, they may want to give cash back to investors through dividends. This is also an important idea of Buffit's first-value investment.
In the Q4 financial report of 2023, Ali announced an increase of $25 billion in repurchase quota, and there is still a $35.3 billion repurchase quota as of the end of the quarter.
After paying a huge price, Ali finally realized the importance of the boundaries of capabilities, and the current management is also trying to pull the company back on track, but it is not a day's cold, and the performance will lag behind the strategy. Before the indicators mentioned in this article have improved significantly, the market will still have a different view of Ali, or pessimistic or optimistic, or ** or short, at this time it is not meaningful to discuss the problem of undervaluation of market capitalization, after the strategy is redetermined, enterprises can only make great efforts to prove themselves in the capital market with performance.