The last fiscal year was difficult for Chinese tech conglomerate Alibaba (BABA 2.68%). Scrutiny from both Chinese and the U.S. regulators (albeit for different reasons), competition from younger companies like Pinduoduo and Douyin, and weaker financial performance were just a few of the challenges the tech company faced.
Unsurprisingly, investors grew increasingly pessimistic, sending Alibaba's share price down by more than 50% in the last 12 months. Let's explore why the company's latest annual results make fiscal 2022 a year that the Chinese tech giant likely wishes to forget.
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Alibaba registered a multiyear low in growth rate
Alibaba was once a darling among investors, especially those who wanted to ride the growth of China's technology industry. A few years ago, it was the undisputed market leader in areas like e-commerce and fintech, as well as a leading -- and rapidly growing -- contender in sectors like cloud computing. Since its IPO in 2014, the company has grown revenue by over 30% annually, and even topped 50% growth in some years.
However, that impressive streak was broken in the company's 2022 fiscal year, which ended on March 31. While it achieved its usual 30%-plus revenue growth rate in the first half of the fiscal year, in the second half, growth came in just shy of 10%. In its fourth quarter, revenue grew by only 9%, while adjusted earnings before interest tax and amortization (EBITDA) fell by 30% year over year. Consequently, its full-year revenue growth rate fell to 19%, the company's weakest result since it went public.
That slower top-line growth reflects the numerous challenges Alibaba is facing. Topping the list is the threat to its crown jewel e-commerce business from younger companies like Pinduoduo. For perspective, Alibaba's commerce business grew by just 18% in its fiscal 2022 -- and much of that growth came from its acquisition of supermarket chain Sun Art Retail. Further, Ant Group, Alibaba's fintech affiliate, has faced intense scrutiny from Chinese regulators, which forced the payments company to suspend its plans for an IPO in 2020. Even the revenue growth of its rising star business, Alibaba Cloud, slowed to 23% in fiscal 2022.
Investors are shunning Alibaba
It has been notoriously challenging to invest successfully in Chinese companies. Cultural differences, poor corporate governance and oversight, and issues with the country's unpredictable government are only a few significant barriers. Yet investors cannot ignore the massive opportunity that China offers, especially as the nation of 1.4 billion people rapidly moves a large fraction of its citizens up into the middle class. Understandably, foreign investors have piled into the country's best companies, such as Alibaba and Tencent, in attempts to ride on that growth story. This strategy worked reasonably well for many years -- until lately, that is.
An increasingly adversarial relationship between the U.S. and China, the Chinese government's harsh crackdown on its dominant domestic tech companies, and other issues have more recently driven Alibaba's share price back down to earth. The tech company's stock hit $73 at one point this year, down more than 75% from its peak of $317. Currently, it's trading at around $110. It also lost the support of many investors, including one of its most ardent supporters, Charlie Munger -- who halved The Daily Journal's Alibaba position early this year.
Alibaba's falling stock price narrowed its price-to-sales ratio to around 2. For perspective, the price-to-sales ratio had been as high as 18 in 2017. In other words, investors are valuing the company at close to a 90% discount relative to its all-time-high valuation, highlighting their extreme pessimism about the company.
What to expect for fiscal 2023
Overall, fiscal 2022 was ugly for Alibaba and its investors. And while I'm hopeful, I don't think the situation will turn around overnight.
First, China's "zero COVID" policy is likely to require further periods of restrictions that will continue to affect its domestic economy, impacting Alibaba's growth. Also, while the most intense period of Chinese regulatory scrutiny on big tech companies may be over, the crackdown will likely continue for a while.
Besides, Alibaba's international expansion efforts may face headwinds due to geopolitical uncertainties and a weak global economic outlook. Understandably, Wall Street's growth estimates for Alibaba in its fiscal 2023 remain low at 8%.
In sum, while Alibaba shareholders might wish to put the last fiscal year behind them, this fiscal year is likely to be a sluggish period for the company too. But looking on the bright side, analysts still expect Alibaba to grow, and some growth is better than none.
