The plan to split into six parts has been hailed by investors who see it as a way to unlock the value of the Chinese tech giant. Over the past two years, the stock has been hit by a wave of regulatory pressure.
Alibaba (Ticker: BABA) shares rose 14.3% on Tuesday, its best day in nine months, after the group laid out its restructuring plan and opened the door for its six parts to raise capital or go public to go.
On Wednesday, the stock rose another 2% to over $100, but still well below its all-time high of around $317 in October 2020.
“From an investor sentiment perspective, we compare Alibaba’s reorganization to Google’s transformation
a clear sentiment booster that should drive the short-term stock price,”
Analysts led by Alex Yao wrote in a statement Wednesday. “Nevertheless, we believe that Alibaba’s restructuring could have a more meaningful impact on business fundamentals and share price in the medium to longer term.”
In a “blue sky” scenario, JP Morgan eye stocks at $210 each.
The restructuring should change the way analysts and investors view Alibaba stock. Still, the reorganization resembles a move from a conglomerate to a holding company, and Alibaba’s Hong Kong and US listings — through American depositary receipts — will not be affected. The holding company will remain in existence, owning 100 percent of China’s core e-commerce business and most likely retaining significant stakes in subsidiaries that go public.
Instead of using a valuation framework like the forward price-to-earnings (P/E) ratio, investors will likely start evaluating the stock as a sum of the parts (SOTP) — especially as there will be new clarity about its subsidiaries, if and when they take place reach the public. This would price in elements of Alibaba’s business that would otherwise be swept under the rug when analyzing the multibillion-dollar company as a large-scale tech conglomerate.
“We believe investors’ valuation framework will shift from mixed forward P/E to SOTP as IPO news hits the market, leading to a potential price appreciation of up to 100%,” the JP Morgan team said .
Others on Wall Street agree.
“With the announcement, we take a look at the SOTP score using the new business units, indicating parity with our $155 target,” analysts led by James Lee add
Securities wrote in a statement Wednesday.
The Mizuho team’s bull case price target is $190. “We believe only core commerce and cloud are priced into the stock and that operations like grocery delivery, online video and payments are free-call options,” the analysts said.
The calculus change in valuation is just one reason to like the plan. Investors also like that the restructuring should spur both Alibaba and its tech peers around the world to do the same.
And not to be overlooked is the signal the plan is sending to Chinese regulators, whose nearly three-year crackdown on the tech sector was the driving force behind the steep decline in Alibaba shares. In its plan, Alibaba made it clear that the split was an attempt to increase competition.
“Spinning entities can help conglomerates reduce potential regulatory risk, unlock trapped value at the conglomerate level and reduce the regulatory risk discount conglomerates have faced,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management, in a statement dated Wednesday.
Write to Jack Denton at firstname.lastname@example.org
Source : www.barrons.com