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Analysts bullish on Alibaba's plans; JPM sees 100%+ upside potential in BABA stock

Published 03/29/2023, 07:43 AM
Updated 03/29/2023, 08:00 AM
© Reuters.  Analysts bullish on Alibaba's plans; JPM sees 100%+ upside potential in BABA stock

© Reuters. Analysts bullish on Alibaba's plans; JPM sees 100%+ upside potential in BABA stock

By Senad Karaahmetovic 

Alibaba (NYSE:BABA) stock closed over 14% higher on Tuesday after the Chinese e-commerce giant confirmed reports that it plans to split into six independent business groups.

Such a move is designed to "unlock shareholder value and foster market competitiveness," Alibaba said in a statement. The 6 business units include:

  1. Cloud Intelligence Group to be chaired by current Alibaba CEO Daniel Zhang;
  2. Taobao Tmall Commerce Group to cover online shopping platforms like Taobao and Tmall;
  3. Local Services Group to cover food delivery service Ele.me and mapping;
  4. Cainiao Smart Logistics to cover logistics service;
  5. Global Digital Commerce Group to cover international e-commerce businesses including AliExpress and Lazada;
  6. Digital Media and Entertainment Group to cover streaming and movie business.

"This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes," CEO Zhang said in a statement.

Each of these units can raise external funding on its own and go public when they're ready, Mr. Zhang said. The only expectation is Taobao Tmall Commerce Group, which will remain under the full control of Alibaba.

Alibaba stock is now up 11.7% year-to-date. JPMorgan analysts see the potential for shares to more than double in the best-case scenario.

"We expect positive share price reaction to the reorganization announcement and our sum-of-the-parts (SOTP) valuation analysis indicates a US$210/HK$205 value per share as a blue sky scenario," they wrote in a note.

What analysts are saying

Goldman Sachs analysts: "We believe… positives could outweigh potential negatives on continued wide holdco discount and/or reduced synergies between Alibaba entities… We view the reorganization as a positive step towards valuation repair for its P/E multiples, given Alibaba's NAV discount is already one of the steepest at 52% referencing our SOTP valuation, wider than other typical holdco discounts of 30-50% globally (and Prosus at 30-40% year-to-date)."

Mizuho analysts: "We believe this new structure would enable each business unit to pursue external capital and provide employee stock ownership plans (ESOP) independently. By doing so, BABA could start to unlock the value of its assets through public listings."

JPMorgan analysts: "From an investor sentiment impact perspective, we liken Alibaba's reorganization to Google's transformation to Alphabet, a clear sentiment booster that should drive near-term stock price. Nonetheless, we believe Alibaba's reorganization could bring about more significant implication to business fundamentals and share price over the mid-to-longer term."

Bank of America analysts: "We view BABA's reorganization plan as positive, from both equity valuation and business competitiveness perspectives. For investors, the move is likely to provide better visibility into value of the company's various businesses, on top of its previous segment reporting (details on the second page). It also lays the foundation for future fundraising, spinoff and market debut of each business group (except Taobao Tmall Commerce), which could potentially unlock higher market value and encourage sum-of-the-parts (SOTP) valuation of the group."

Truist analysts: "We remain constructive on BABA as it continues to show improvement in margins amid a tough demand environment in China and overseas. While the March quarter started weak, demand trends have improved materially since then with the economy reopening, driving positive Y/Y growth. We're encouraged by current trends but note that management commentary points to increased investments to support select growth initiatives, which while sound, are likely to keep margins in check near-term."

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