Stock Analysis

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

  •  Updated
NYSE:BABA
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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 liquidity crisis at Chinese 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.

What are the risks and opportunities for Alibaba Group Holding?

Alibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally.

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Rewards

  • Trading at 5.5% below our estimate of its fair value

  • Earnings are forecast to grow 26.91% per year

Risks

  • Profit margins (3.8%) are lower than last year (8.7%)

  • Large one-off items impacting financial results

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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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Richard Bowman

Richard Bowman

Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.

About NYSE:BABA

Alibaba Group Holding

Alibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally.

Flawless balance sheet with reasonable growth potential.