Alibaba's (BABA 0.59%) stock price sank to its lowest levels in nearly five years following its fiscal 2022 third-quarter earnings report on Thursday.
For the period (which ended Dec. 31), the Chinese tech giant's revenue rose 10% year over year to 242.58 billion yuan ($38.07 billion), which fell short of analysts' estimates by 3.21 billion yuan. That was also its slowest growth rate since its 2014 IPO. Adjusted net income fell by 25% to 44.62 billion yuan ($7.0 billion), or 16.87 yuan ($2.65) per share, which cleared analysts' expectations by 0.82 yuan.
The mediocre growth wasn't surprising since management had already reduced its fiscal year guidance in November. It mainly attributed the slowdown to macroeconomic headwinds, intense competition, and tighter government regulations.
Image source: Alibaba.
However, Alibaba's steep share price decline -- which was exacerbated by concerns about inflation, rising interest rates, and Russia's invasion of Ukraine -- has also reduced its forward price-to-earnings ratio to just 13 as of this writing. So should investors consider buying Alibaba's stock during this period of market pessimism?
How bad was Alibaba's slowdown?
During its fiscal third quarter, Alibaba generated 88% of its revenue from its commerce businesses: China commerce, international commerce, local consumer services, and its Cainiao logistics division.
It generated 8% of its revenue from Alibaba Cloud, which is the largest cloud infrastructure platform in China; 3% from its digital media and entertainment segment, and the remaining 1% from its "Innovation Initiatives" division.
Alibaba's combined commerce and cloud businesses both experienced significant slowdowns during the quarter:
|
Metric (YOY change) |
Q3 FY2021 |
Q4 FY2021 |
Q1 FY2022 |
Q2 FY2022 |
Q3 FY2022 |
|---|---|---|---|---|---|
|
Commerce revenue growth |
38% |
72% |
35% |
31% |
9% |
|
Cloud revenue growth |
50% |
37% |
29% |
33% |
20% |
|
Total revenue growth |
37% |
64% |
34% |
29% |
10% |
Source: Alibaba. FY = Fiscal year. YOY = Year-over-year.
Within the commerce segment, Alibaba's Chinese commerce revenues -- which mainly come from its Taobao, Tmall, and wholesale marketplaces -- grew by just 7%, compared to its 32% growth in fiscal Q2.
During the conference call, Deputy CFO Toby Xu attributed that deceleration to the "slowing macro" environment as well as "increased competition" -- which suggests that the government's tighter oversight of Alibaba's e-commerce business has eroded its defenses against JD.com (JD 6.12%), Pinduoduo (PDD 2.80%), and other challengers.
That slowdown was partly offset by the 18% growth of Alibaba's international commerce business, which includes its Southeast Asian marketplace Lazada, the Turkish marketplace Trendyol, and the cross-border marketplace AliExpress. However, that also represented a deceleration from the segment's 34% growth in the previous quarter.
As for the deceleration of its cloud business, Alibaba CEO Daniel Zhang cited "slowing demand" from internet-oriented companies as the main headwind -- which suggests that China's tighter data privacy regulations are curbing the use of its cloud-based services. Nonetheless, Zhang said Alibaba Cloud was still experiencing "strong growth" in the financial services and telecom sectors.
Declining margins and a murky future
On a generally accepted accounting principles (GAAP) basis, Alibaba generates all of its profits from its Chinese commerce division. Its international retail, cloud, digital media, and innovation initiatives units aren't profitable yet. On an adjusted earnings before interest, taxes, and amortization (EBITA) basis, its cloud business generates a very slim profit.
In previous years, Alibaba relied on the higher-margin revenue from its domestic commerce unit to support the expansion of its unprofitable divisions. However, Alibaba's adjusted EBITA margins withered over the past year as the regulatory, macroeconomic, and competitive headwinds squeezed its core profit engine.
|
Metric |
First 9 Months of FY2021 |
First 9 Months of FY2022 |
|---|---|---|
|
Chinese commerce adjusted EBITA margin |
47% |
33% |
|
Total adjusted EBITA margin |
28% |
18% |
Source: Alibaba. FY = Fiscal year. EBITA = earnings before interest, taxes, and amortization.
That pressure will make it more difficult for Alibaba to expand its digital ecosystem. It could also narrow its moat against other Chinese tech giants like Tencent (TCEHY 2.19%) and Baidu (BIDU 0.62%).
Alibaba didn't provide any fresh guidance, which suggests its previous target for full-fiscal-year revenue growth in the 20% to 23% range remains intact.
However, analysts expect its revenue to rise by just 19% this year, and anticipate its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will decline by 19%. In fiscal 2023, they expect its revenue will rise by 18%, and its adjusted EBITDA will improve by 19%.
Investors should take those estimates with a grain of salt, but they do imply that Alibaba's margins could gradually stabilize over the next few quarters as it scales up its higher-growth cloud and international commerce businesses. If Alibaba can maintain double-digit percentage revenue and earnings growth for at least a few more years, its stock will look like a bargain at its current forward price-to-earnings multiple.
However, Alibaba's stock has also been bid down because it faces unpredictable regulatory headwinds in China as well as the threat of delisting from U.S. stock exchanges. Those long-term risks might convince value-seeking investors to stick with American tech stocks instead.
Is it time to buy Alibaba?
Alibaba's growth is decelerating and its margins are declining. The headwinds it faces could be exacerbated by regulatory issues, and they could persist for the foreseeable future. Therefore, in this challenging market, I'd rather buy more promising growth stocks than roll the dice on Alibaba's recovery.
