Earlier this week Chinese e-commerce giant Alibaba (NYSE: BABA) said that it would split into six businesses. The stock soared after the announcement and Morgan Stanley sees more upside amid the value unlocking.
Alibaba would become a holding company and would split the business into six units. These are The Taobao Tmall Commerce Group, Cainiao Smart Logistics, Local Services Group, Global Digital Commerce Group, Cloud Intelligence Group, and Digital Media and Entertainment Group.
Alibaba said that the move would help it unlock stockholder value. In his remarks, BABA CEO Daniel Zhang said, “This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes.”
Alibaba stock rose after announcing the business reorganization
Notably, BABA stock has been sliding ever since its co-founder Jack Ma got into trouble with the Chinese authorities over his critical comments about the country’s financial regulators.
The stock lost a massive $600 billion in market cap from its 2020 highs and has been a consistent underperformer since then.
The stock has meanwhile soared after the company announced the split and said that the new business units might pursue a listing subsequently.
There are now hopes that Alibaba would also consider an IPO of Ant Financial in due course. China blocked the IPO in 2020 and since then the fintech giant’s valuation has tumbled to only about a fifth of previous highs.
Morgan Stanley expects Alibaba stock to double
In a recent note on BABA, Morgan Stanley analysts led by Gary Yu said there is “potential for more than 2x upside to our bull case of US$200 per share.”
They added, “With gradual consumption recovery in China … and the potential catalyst of corporate restructuring, we reiterate BABA as our top pick in China Internet.”
Notably, China expects its GDP to rise “around 5%” in 2023. China’s GDP rose at an annualized pace of 3% in 2022 which was better than the 2.8% growth that analysts expected. The growth rate was however the second lowest since 1976 and the world’s second-largest economy fared poorly in only 2020 when it grew by a mere 2.2%.
China was officially targeting GDP growth of 5.5% in 2022. However, the target looked demanding at the very onset. As the year progressed it became amply clear that the country would not be able to meet the target.
China ended its zero-COVID policy last year
Amid slowing domestic growth and rising angst among people, China abandoned the zero-COVID policy last year. The Chinese economy is expected to grow at a brisk pace in 2023 even as it is slowing down structurally.
While China became almost “uninvestable” for many global investors after the tech crackdown, fund flows into the world’s second-largest economy have improved in 2023.
In its note, Morgan Stanley said, “We view BABA as a key beneficiary of China’s reopening and a proxy for inflows to China from global investors. We estimate that there is about an 80%+ (or “highly likely”) probability for the scenario.”
China is warming up to the tech sector
China has taken several decisions which show that the country is now warming up to the tech sector. It allowed the downloads of Didi apps, approved Ant Financial’s request to raise capital, and also announced overseas listing rules for domestic companies.
Many see Ma’s reappearance in China after spending almost a year abroad as a sign of China warming up to the tech sector.
As Stephen Roach, a senior fellow at Yale University told CNBC, “Jack just didn’t show up in Hangzhou because he was tired of traveling around. I think it was well orchestrated and fits with the government’s campaign to demonstrate that, you know, they are relaxing pressures on their private sectors and are welcoming the rest of the world.”
Recently, Apple CEO Tim Cook also visited China where he praised the country.
What’s next for Alibaba stock?
Coming back to Alibaba, Wall Street analysts are mostly positive on the stock after the reorganization and Jefferies believes that it is trading at a “meaningful discount.” Notably, Alibaba’s valuation discount with global tech peers has widened over the last couple of years as the company’s valuation multiples took a beating amid the tech crackdown.
Tim Seymour, founder, and chief investment officer of Seymour Asset Management is also constructive on Alibaba’s reorganization and said, “There’s always been a lot of value here. In fact, you get Ant for free when you invest in this company. This is great news to me. This is a wait-and-see moment.”
Morgan Stanley expects Chinese stocks to outperform
Morgan Stanley also expects Chinese stocks to outperform their US counterparts this year. Notably, many fear a US recession in 2023 as the Fed continues to raise rates in order to tame inflation.
Many market participants are bullish on Chinese stocks amid expectations of a strong economic recovery in 2023. Also, many analysts find Chinese stocks undervalued as compared to global stocks.
That said, many still investors still have scars of the 2021 tech crackdown in China which eventually led to the forced delisting of Didi.
As for Alibaba, after the recent rally, Alibaba stock has turned positive for the year and is up 8.6% YTD. The stock meanwhile still trades a fraction of its 2020 highs.