George Soros (Trades, Portfolio) is a billionaire investor and the founder of Soros Fund Management, an investment fund with around $25 billion in assets under management.
In the second quarter of 2023, the fund made a number of investments, with a notable one being Chinese tech giant Alibaba Group Holding Ltd. (BABA, Financial), which is down 68% from its all-time high in October 2020.
Therefore, I will break down the company, its latest earnings and look at possible reasons why he could have been attraced to the stock. Let’s dive in.
Company split pending
In March, Alibaba announced it will be splitting the business into six segments each with its own CEO. The first segment will be its China Commerce business, which includes its core e-commerce services provided by Tmall and Taobao.
Its next segment with huge potential is its Cloud Intelligence group, which will be led by Daniel Zhang, the current CEO of the entire company. Its Cainiao Smart Logistics and Local Services Group will also be spun out. Then, of course, we have its Global Digital Commerce Group, which includes AliExpress. Finally, Alibaba’s Digital Media division, which includes its movie studios and streaming, will be spun off, with the CEO being Fan Luyuan.
The pending division of the company into multiple segments should offer a number of benefits to unlock shareholder value. This includes faster decision-making, more accountability and capital raising benefits.
A division also makes it a smaller target for regulatory attacks, and likely adds extra legal distance between Alibaba and its founder, Jack Ma.
Therefore, this could be one of the reasons why Soros' firm purchased the stock.
Recovering financials
On Aug. 10, Alibaba reported solid financial results for the June quarter. Its revenue was $32.3 billion, which rose by 5% on a U.S. dollar basis. To put things into perspective, in the prior (March 2023) quarter, the company reported negative growth and similar rates in the prior four quarters. Therefore, this positive growth could be a solid indicator of a turning point for the business and the stock.
Its Taobao and Tmall e-commerce group contributed to 49% of total revenue or approximately $16 billion. Its revenue growth was solid with 12% year over year reported. This was driven by a 6% increasein daily active users.
In addition, Alibaba has invested in improving the merchant experience, which has resulted in over a 20% increase in the daily average number of merchants paying for advertising. This also resulted in its customer management revenue rising by a solid 10% year over year to $11 billion.
Its direct sales rose by 21% year over year to $4 billion, driven by strong sales in the electronic category, which looks to be recovering.
It International Digital Commerce group also reported surprisingly strong results with a blistering 41% year-over-year increase to $3 billion in revenue. This was driven by strong sales and advertising revenue growth in addition to expansion efforts in emerging Asian countries such as Thailand and the Philippines.
Its Turkey-based fashion business, Trendyol (acquired), also continues to grow at a solid rate, which helps to diversify the business away from just Asia. Trendyol is the leading fashion e-commerce player in Turkey with approximately $3 billion in revenue as of 2022.
Alibaba’s Local Services group has also continued to produce solid results, growing by 30% year over year, thanks to strong travel demand via its Amap brand.
AI cloud opportunity
Alibaba’s Cloud revenue rose by 4% year over year to $3.45 billion. The growth rate was impacted by the reopening of China’s economy which has impacted the usage for video streaming, remote working, etc. A top customer also lowered consumption, which impacted revenue.
A positive is its cloud business is the market leader with 36% market share as of the end of 2022, according to Canalys data. In addition, the cloud industry is forecasted to grow by a solid 12% in 2023 and reach a value of $90 billion by 2025, up from $30 billion in 2021, according to McKinsey data.
Alibaba’s cloud also offers access to over 1,000 artificial intelligence models, including its own Tongyi Qianwen and Meta Platforms' (META, Financial) Lama 2.
Margins and balance sheet
Alibaba reported strong profitability for the quarter with operating income of $6.1 billion, up a blistering 64% year over year. The business also reported earnings per share of $1.84, which beat analyst forecasts by 41 cents. This was driven by cost of revenue improvements, which declined by 1% year over year.
During the quarter, the company bought back a staggering $3.1 billion worth of shares, which made up 1.4% of all shares outstanding.
Alibaba has a robust balance sheet with $75 billion in cash and short-term investments in addition to total debt of $27 billion, which is manageable.
Valuation
Alibaba trades with a forward price-earnings ratio of 14.2, which is lower than its five-year average. The company also trades with a price-sales ratio of 1.8, which is below its average for the same period.
The GF Value Line points to a fair value of $123.5 per share based on its historical ratios, past financial performance and anaylsts' future earnings projections. Therefore, the stock is modeslty undervalued at the time of writing.
Guru interest
Soros' fund purchased 175,000 shares of Alibaba. The stock traded for an average price of $87 per share during the quarter, which is a slight discount to its current price.
Final thoughts
Alibaba is an enormous market-leading technology company with a diverse business model. The company has faced a number of challenges over the past several years, from billion-dollar fines to macro headwinds. However, Alibaba now looks to be at a turning point as revenue growth has improved, as well as its margins.
Therefore, it does not surprise me that the Soros Fund invested, especially given the cheap valuation. All eyes will be on its upcoming split and what shareholder value that may create.
