Alibaba‘s (NYSE: BABA) stock price experienced a 6% dip on Feb. 7 following the release of the Chinese e-commerce and cloud leader’s latest earnings report. The third-quarter revenue for fiscal 2024, ending on Dec. 31, saw a 5% year-over-year rise to 260.35 billion yuan ($36.67 billion), surpassing analysts’ estimates by $270 million. Despite this, its adjusted earnings per ADS saw a 2% decline to $2.67, but still managed to exceed the consensus forecast by $0.03 per share.
Although Alibaba’s headline numbers seem unremarkable, the company finds itself grappling with efforts to reinvigorate its core e-commerce and cloud businesses. Nevertheless, its stock currently trades just 8% above its IPO price, presenting an attractive opportunity at a valuation of 10 times next year’s earnings. Given this, could an investment of $10,000 in Alibaba today potentially lead to millionaire status over the next 20 years, following a contrarian approach?
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Alibaba’s Recent Performance
At its peak in October 2020, Alibaba was experiencing the zenith of success with both its Chinese e-commerce marketplaces, Taobao and Tmall, and its cloud platform firing on all cylinders. From fiscal 2015 to fiscal 2020, the company registered impressive growth rates in revenue (46% CAGR) and net income (42% CAGR).
However, Alibaba’s revenue rose by a moderate 41% in fiscal 2021, with net income nudging up by just 2% due to a hefty $2.75 billion fine imposed by China’s antitrust regulators. The subsequent restrictions and challenges have significantly impeded the growth of Alibaba’s essential Chinese e-commerce platforms and have compelled the company to look beyond China to sustain its e-commerce business.
Concurrently, Alibaba’s cloud segment faced its own set of hardships, as macro headwinds led to curbed cloud service spending and intensified competition.
Challenges Faced by Alibaba
Alibaba’s revenue growth suffered a slump to 19% in fiscal 2022 and a mere 2% in fiscal 2023, prompting the company to undergo a restructuring into six new units and undertake cost-cutting measures. However, despite these efforts, its core businesses continued to face challenges.
For instance, Taobao and Tmall struggled, facing competition from PDD’s Pinduoduo, while the Cloud Intelligence segment experienced sluggish growth as it consciously reduced exposure to its lower-margin industries and customers. Additionally, Alibaba’s International Digital Commerce business, Local Services, and Digital Media divisions remained unprofitable throughout the year. Despite this, its Cainiao segment finally turned profitable after implementing aggressive cost-cutting measures.
Future Outlook for Alibaba
Alibaba is in dire need of its profitable Taobao/Tmall and Cloud Intelligence segments to drive growth and subsidize the expansion of its yet unprofitable ventures. However, a near-term recovery appears challenging due to China’s economic slowdown and intense competitive pressures. The recent expansion of its buyback plan by $25 billion hints at its struggles to boost revenue through astute investments or acquisitions.
For a $10,000 investment in Alibaba to transform into $1 million, assuming valuations remain static, the company would need to achieve a 26% CAGR in revenue and earnings over the next 20 years. However, given the prevailing macro, regulatory, and competitive challenges, these growth rates seem increasingly unattainable for its core e-commerce and cloud businesses.
Looking ahead, analysts forecast Alibaba’s revenue to rise at a CAGR from fiscal 2023 to fiscal 2026,
Assessing Alibaba Group’s Potential Amid Market Volatility
Alibaba Group, a juggernaut in the domain of e-commerce and cloud computing, has faced choppy waters recently. Despite reporting a net income growth rate of 27%, its stock prices remain subdued. Coupled with the rapidly evolving Chinese market, this stagnation has driven investors to seek greener pastures. While Alibaba’s historical significance is undeniable, is it time for a shift in focus?
The Temptation of Stability
Alibaba’s solid performance, with a mere 8% margin, presents a stark contrast to the allure of high-growth opportunities. The company’s resilience in maintaining its growth rates, however, should not be dismissed lightly. Chinese economic dynamics, rife with volatility, pose a stern test for any business.
China’s E-Commerce Landscape
In the heyday of Chinese e-commerce, Alibaba was unequivocally its vanguard. Yet, amid the fervent pursuit of financial prosperity, the market landscape has evolved drastically. Enter Pinduoduo (PDD), a fresh contender, which financial pundits boldly compare to Amazon. PDD’s meteoric potential commands attention, despite Alibaba’s ongoing recovery efforts.
The Question of Investment
Should investors redirect their funds from Alibaba to PDD? The financial media, represented by The Motley Fool, contends that the latter harbors the promise of astronomical returns, beyond the oxymoronic. The pitch at the 10 best stocks does not include Alibaba, paving a paving a path for more lucrative opportunities in the market.
For an investor pondering the reconnaissance of potential bets, the question of Alibaba versus PDD interlaces with deeper queries about the dynamics of e-commerce and the trajectory of Chinese businesses vis-à-vis global conglomerates.
So, what will it be?
The choice is yours, though one thing is certain: the ground is shifting beneath the e-commerce ecosystem, and astute investors must navigate this evolution skillfully.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu, JD.com, and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.