Shareholders Benefit from Alibaba’s Cloud Business Stock Dividend in Earnings Report

Alibaba Group’s adjusted earnings before interest, taxes, and amortization (EBITA) increased by 60% year-on-year, which is 15% higher than Refinitiv consensus figures. Despite this positive news, shares in the company fell 5% in U.S. trading on May 18, as the market was disappointed with the slower pace and magnitude of value release than expected. Adjusted EBITA margins are expected to decline over the next three years due to investments in users, a strong ecosystem, and technology in the China commerce business.

However, Alibaba International Digital Commerce Group contributes 10% to the company’s overall valuation and plans to raise external capital instead of going public in the near future. Additionally, Alibaba plans to spin off Cloud Intelligence Group through a stock dividend to shareholders and list the group in the next 12 months. This is expected to be a net positive for shareholders before the stock dividend, but some investors may reduce stakes in Alibaba Group after the stock dividend due to a preference for the more promising cloud business.

Despite these changes, the company’s fair value estimate remains at $177 per share based on discounted cash flow valuation, making it undervalued for investors looking at a three- to five-year investment horizon who may benefit from the value release from the restructuring. To offset any dilution from Crowd Intelligence Group’s planned fund-raising activities, Alibaba’s capital management committee intends to keep it at a manageable level.

In terms of business performance, Alibaba plans to upgrade Taobao into a one-stop consumption and lifestyle platform. The company is increasing the variety of its supplies through measures to support small businesses and rolling out merchant tools to attract and retain merchants. While customer management revenue decreased by 5% year-over-year in the quarter, we expect GMV to grow in line with customer management revenue for the remainder of the year ending March 2024.

Despite the planned restructuring, Alibaba’s board of directors expects the business groups to maintain synergies between them. The company intends to return profits to shareholders through dividends and share buybacks in the future.

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