Alibaba Group Holding Ltd (NYSE:BABA)
The proposal made by Alibaba (NYSE:BABA) to divide the company into six distinct entities has been met with positive reception from investors, who saw the move as a means of releasing latent potential in the Chinese multinational technology corporation. The share price has been hammered for the previous two years due to a wave of regulatory demands that have been placed on the company.
After the organization outlined its restructuring plan and opened the door to its six divisions raising capital or going public, shares of Alibaba (NYSE:BABA) surged by 14.3% on Tuesday, the company’s greatest day in nine months, after the group opened the door to its six parts raising capital or going public.
The share price increased by another 2% on Wednesday, reaching $100, although it is still a long way off from reaching its all-time high of almost $317 in October 2020.
According to J.P. Morgan, “From the perspective of the impact on investor sentiment, we liken Alibaba’s reorganization to Google’s transformation to Alphabet (NASDAQ:GOOGL), a clear sentiment booster that should drive near-term stock price.” Alibaba’s reorganization is similar to Google’s metamorphosis into Alphabet. Analysts from Morgan JPM +0.20%, led by Alex Yao, wrote about it in a note that was released on Wednesday. Despite this, we believe that Alibaba’s reorganization may have more substantial ramifications for the company’s business fundamentals and share price in the medium to long term.
In a hypothetical best-case scenario, J.P. Morgan is considering a price of $210 per share for the shares.
It is expected that the restructuring will completely change how analysts and investors view Alibaba shares. Despite this, the reorganization is analogous to the transition from a conglomerate to a holding company, and the stock listings of Alibaba in Hong Kong and the United States (through American depositary receipts) will not be impacted by this change. The holding company will continue to operate, completely controlling the core Chinese e-commerce firm, and will very certainly continue to hold large shares in any subsidiaries that choose to go public.
Rather than adopting a valuation framework such as forward price-to-earnings (P/E), investors will presumably start valuing the stock as the sum of the parts (SOTP), particularly given the fact that there will be fresh clarity on the subsidiaries if and when they go public. Specifically, investors will value the company as the sum of the components (SOTP). When examining the multibillion-dollar corporation as an all-encompassing tech conglomerate, this would price in aspects of Alibaba’s operation that may otherwise get brushed under the rug if the analysis were not conducted in this manner.
According to what the J.P. Morgan analyst said, “We believe investors’ valuation framework will shift from a blended forward P/E to SOTP as news flow on initial public offerings hits the market,” which might result in an increase in the share price as much as 100%. Morgan team.
On Wall Street, other people feel the same way.
Analysts at Mizuho Securities, led by James Lee, stated in a note that was released on Wednesday that “With the announcement, we take a look at SOTP valuation using the new business units, which indicates parity with our $155 target.”
The bull case price goal that the Mizuho team has established is $190. According to the analysts, “We believe that only core commerce and cloud are priced into the stock and that operations like Food Delivery, Online Video, and Payments are free-to-call options.” [Case in point:] “We believe that only core commerce and cloud are priced into the stock.”
There are several reasons to like the idea, one of which is the calculus modification on valuation. Investors also enjoy the fact that the restructuring should make Alibaba more competitive globally and encourage its other digital companies to follow suit.
And, not to be missed, is the signal that the plan provides to Chinese regulators. The Chinese government’s crackdown on the technology industry for the past two and a half years has been the primary factor in the precipitous decrease in Alibaba’s share price. Moreover, the plan sends a signal to Chinese authorities that the plan will be implemented. Alibaba made it very apparent in its strategy that the separation was an attempt to boost competition in the industry.
Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note on Wednesday that “spinning off units may help conglomerates lower potential regulatory risk, unlock trapped values at the conglomerate level, and reduce the regulatory risk discount conglomerates have faced.”
It’s Possible That Alibaba Stock Will Double. The valuation will be significantly altered by splitting the company up.
Featured Image: Megapixl
