It has been a rough year-plus for Alibaba (BABA 3.46%), which has seen its stock price decline some 60% since hitting all-time highs in October 2020. But with the calendar about to flip to 2022, management hopes to turn the page as well; Alibaba just held an analyst day in which the company laid out its plans to revive growth coming out of this rough period.
But was there really anything game-changing in the new presentation?
Improving the core
Central to Alibaba's strategy is improving on its current core business, its e-commerce marketplaces that dominate China's higher-tier, wealthier cities.
The plan contains several elements. First, Alibaba hopes to increase the number of "VIP" customers that pay for Alibaba's 88VIP subscription, which is similar to Amazon Prime. 88VIP members spend about eight times more than average customers, but only about 50 million out of Alibaba's 946 million monthly active users are paying for premium subscriptions. In the presentation, management set the goal of doubling that number in the future.
Next, Alibaba is targeting older customers, who became more comfortable using e-commerce services during the pandemic, and are more price-sensitive. Alibaba is also upgrading hands-on services linked to big-ticket items such as installation of home décor.
Meanwhile, management aims to use artificial intelligence and automation to make its digital ads more efficient. Remember, digital ads are Alibaba's core profit center. Management is now revamping its digital ad system from a "product-based" ad system to a "business target-driven" system, which appears to use more artificial intelligence and automation. According to management, the change is resulting in a 30% increase in returns on investment for advertisers, which should drive higher ad rates in the future.
New areas of investment
Aside from the core marketplaces, Alibaba is also investing heavily in new areas of growth. While the company regularly touts these new services, basically all are still losing money, with the payoff uncertain. Still, management put forward aggressive new investment plans.
These include investments in lower-tier markets that gravitate toward Alibaba's Taobao Deals & Taocaicai group-buying marketplaces. Alibaba has reached about 270 million users in these markets, out of a potential total addressable market of 600 million, and that 270 million was up 200% in the past year. Current competition in this area is fierce, however, so it remains to be seen if Alibaba can become a lead player in lower-tier markets.
Management also sees its local services platform Ele.me as a key pillar of growth. Currently, Ele.me is mostly a restaurant food delivery platform, and a second-place one at that, behind dominant food delivery app Meituan (MPNGF 5.55%). However, management sees Ele.me eventually delivering everything and anything to the home, along with AI recommendations for local services through its AMAP app.
Alibaba's Cainiao logistics segment is also a growth center that's currently losing money; however, a big key will be more driverless delivery vehicles and pickup stations. That could lower labor costs and potentially bring this unit to profitability in the future, so that automation investment is worth keeping an eye on as well. Also, some may not realize that Cainiao has a huge international business, which grew 40% in the past half-year.
Finally, the cloud computing opportunity remains perhaps Alibaba's biggest opportunity outside its core marketplaces. It's currently the only one of these new segments that is profitable on an adjusted EBITDA basis. It's also one in which Alibaba actually has market leadership, and its growth prospects are quite good. Management sees the Chinese cloud market growing at a 42% annual growth rate in the next three years and a 37% growth rate in the next five years, rates higher than that of the U.S. cloud businesses.
There wasn't much new in the presentation, however
Although it was lengthy, I didn't see anything particularly new in the investor day presentation that was not already a talking point in recent earnings calls. Likely, if you were bullish on Alibaba's potential from these very cheap valuation levels, you were likely bullish coming out of the presentation, and vice-versa if you were concerned about competition and more difficult growth prospects.
Personally, I think Alibaba's stock is cheap enough, at roughly 14 times this year's earnings estimates and 12.5 times next year's earnings estimates, that it could make a good buy for those betting on the rebound of Chinese tech stocks. However, the picture is decidedly murky. Management, which now has a new CFO, will likely have to prove out some of the new businesses, especially on the profitability front, before the stock can take off again.