Alibaba Bulls See $140 Billion Rally Extending on Cohen’s Buy

(Bloomberg) — China tech bulls expect activist investor Ryan Cohen’s foray into Alibaba Group Holding Ltd. to add impetus to the stock, which has increased more than $140 billion in market value in the latest turnaround.

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Hong Kong-listed shares of the Chinese e-commerce leader jumped 3% early Tuesday following a report that Cohen has acquired a stake worth hundreds of millions of dollars in the second half of last year and is pushing for more buybacks. The stock later trimmed gains, but remains about 85% higher than its October trough on regulatory easing and China’s reopening from Covid curbs.

Cohen’s entry is “positive for the stock because it helps to raise confidence especially among Western investors who have been sceptical of China,” said Vey-Sern Ling, a managing director at Union Bancaire Privee. “It helps to highlight how undervalued the shares are, and if he encourages more buybacks then that helps shareholder returns too.”

READ: Meme Stock Icon Cohen Targets Alibaba in Rare China Activism

Once deemed “uninvestable” by some on Wall Street, the stock has been winning back investors as a loosening of regulatory scrutiny and China’s pent-up consumer demand are expected to boost its shares. Cohen’s view is that Alibaba can achieve double-digit sales expansion and almost 20% growth in free cash flow over the next five years, according to reports.

Union Bancaire Privee’s Ling agreed with the meme-stock icon’s estimates, saying “his forecasts are not very different from consensus so they’re not unrealistic.”

Alibaba in November approved a $15 billion expansion to an existing $25 billion buyback program, while extending the duration to 2025. Despite the announcements, it hasn’t been active in repurchasing shares in open market operations.

The company’s cash and short-term investments as of September 2022 are worth nearly a third its market value, according to Bloomberg’s calculations.

Cohen is right on the company’s ability to do more buybacks as it is “a cash-flow machine,” said Hao Hong, an economist with Grow Investment.

While the stock remains cheap, its earnings outlook is yet to improve.

The 12-month forward earnings estimate for Alibaba has declined about 8% this month compared to an advance of 1.7% for that of the Hang Seng Tech Index, according to Bloomberg data. The stock is trading at 15.2 times of its 12-month forward earnings, cheaper than its five-year average of 18.8 times.

Analyst target prices imply a 23% return over the next 12 months for the firm’s Hong Kong-listed shares, compared to less than 7% for rival Tencent Holdings Ltd., according to forecasts tracked by Bloomberg.

–With assistance from Jeanny Yu.