Alibaba (NYSE:BABA) can Easily Afford its $15.5 billion Donation to the Common Prosperity Initiative

By
Richard Bowman
Published
September 15, 2021
NYSE:BABA
Source: Shutterstock

Shares of  Alibaba Group Holdings (NYSE:BABA) have fallen back toward the stock’s 52-week lows, as investors once again grow nervous about Chinese stocks. This time around the selling has been prompted by the apparent collapse of property development firm Evergrande Holdings.

Alibaba’s share price has fallen as much as 50% in the last 10 months and traded as low as $152.80 in late August. At the end of August, the company pledged to donate $15.5 billion to China’s ‘Common Prosperity’ initiative. The money will be paid out over five years to support various technology and small business initiatives. It’s unclear at this stage whether Alibaba will receive any equity in return for the donations.

Check out our latest analysis for Alibaba Group Holding

How does this donation affect Alibaba’s cash reserves and cash flows?

$15.5 billion is a lot of money, even for a company of Alibaba’s size. This sum is also in addition to a $2.75b fine imposed by China’s anti-monopoly regulator, which has already been paid.

The donation of  $15.5 billion,  or CN¥100 billion, comes in at around 20% of Alibaba’s cash and short-term investments, which amounted to CN¥483 billion at the end of the last quarter. Fortunately, the company has very low debt and liabilities, so even if the donation was made in one payment, the balance sheet would remain strong.

NYSE:BABA Assets and liabilities September 14th 2021
NYSE:BABA Assets and liabilities September 14th 2021

The donation has actually been pledged over a five-year period, so it should also be compared to Alibaba’s cash flows. Spread equally over five years. It comes to CN¥20 billion each year, or about 12.5% of the CN¥160 billion in free cash flow Alibaba generated over the last 12 months. The company’s cash flow is forecast to grow to CN¥245 billion in 2024, implying the annualized contribution will fall to just 8% of free cash flow.

earnings-and-revenue-growth
NYSE:BABA Earnings and Revenue Growth September 14th 2021

What is Alibaba Group Holding worth?

Either way we look at this donation, it shouldn't have a major impact on Alibaba’s balance sheet or cash flow. And, according to our estimates of the intrinsic value of Alibaba, the stock is trading at an attractive discount. Our estimates, which are based on the analyst forecasts in the above chart, peg the fair value at about $265.45, 65% higher than the current price.

Six weeks ago when we looked at Alibaba’s valuation, we arrived at an intrinsic value of $273.02, which is 3% higher than the current estimate. This isn’t surprising as analysts forecasts have declined slightly since the beginning of the year, so the intrinsic value has also declined slightly.

The China Discount

Alibaba certainly appears to be trading at a discount to its intrinsic value. However, the share price is likely to be affected by sentiment rather than value for the foreseeable future. It’s also possible that Chinese shares continue to trade at a discount until investor confidence is restored - so investors will need to manage their expectations for the stock price.

Besides Alibaba’s valuation and the regulatory pressure on Chinese stocks, our analysis of Alibaba highlights several other attributes and risks worth noting.

If you are no longer interested in Alibaba Group Holding, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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