The last two years have been tough for Alibaba's (BABA 0.15%) investors. A falling share price -- down more than 70% from its high in 2020 -- and declining growth gave enough reasons for investors to shy away from the stock.
Still, there are some reasons that some of the best investors -- like Charlie Munger -- are holders of the stock. Digging further might reveal some of these reasons.
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Alibaba is still a highly profitable company
Once a darling among growth investors, Alibaba recently fell from grace as revenue growth fell to a standstill. In the first nine months of the fiscal year ended March 31, 2022, revenue grew by a meager 2% amid a weaker e-commerce performance and stagnating growth in the cloud business.
While investors might be dissatisfied with a 2% growth, Alibaba was not the only big tech company facing a tough time. For example, Meta Platforms reported a 1% decline in revenue, while Amazon delivered 9% revenue growth in 2022 (down from 22% in the prior year). In other words, Alibaba's performance wasn't that bad compared to the rest.
As Alibaba faced headwinds in top-line growth, the company worked hard to improve its cost structure and efficiency, resulting in a solid bottom-line improvement. For example, adjusted earnings before interest, tax, and amortization (EBITA) increased by 16%, while non-GAAP (generally accepted accounting principles) net income grew by 12% in the latest quarter. Net cash from operations also rose 9% to 87 billion yuan ($12.7 billion).
With its solid cash flow generation, Alibaba had the firepower to invest in younger businesses (more on that later) and buy back shares -- it bought back $3.3 billion of stock in the latest quarter alone.
While we have little idea when (or whether) Alibaba can regain its historical growth performance, investors might find it comforting knowing that the management team has been working hard to position the company for better times.
A little-known subsidiary is firing on all cylinders
Most investors know Alibaba for its e-commerce and, to a certain extent, its cloud businesses. But other lesser-known ventures within the conglomerate's arm are equally crucial to its competitive position. One of them is its logistic arm, Cainiao.
For starters, Cainiao is a logistic platform that aims to build a global fulfillment network by partnering with logistics partners throughout the logistics chain. Its mission is to deliver customer orders within a day in China and three days elsewhere globally.
Cainiao plays a significant role in Alibaba's global ambition, especially as an enabler of its e-commerce business. The better Cainiao performs, the better the e-commerce shopping experience is, which in turn, improves customer stickiness. Besides, Cainiao leverages its expertise from serving Alibaba's consumers to provide a better service to external customers.
Moreover, Cainiao is gradually becoming material to Alibaba Group financially. In the quarter that ended Dec. 31, the logistic company grew revenue by 27% to 17 billion yuan and was the third-largest revenue contributor behind e-commerce and cloud segments. Comparatively, groupwide revenue grew by just 2%.
Cainiao is already a significant player in China. It has a good chance of becoming a major global logistics company, serving customers within and beyond Alibaba's umbrella.
So is Alibaba a buy?
It was not pretty for investors when Alibaba went from a growth darling to almost no revenue growth in the first nine months of 2022. Still, it's probably too early to write the company off. After all, the tech giant grew its profits during this period and still has room for growth in the long run via its younger subsidiaries, such as Cainiao.
All said, while it takes a lot of courage and a strong stomach for new investors to buy into the stock, existing investors would do best to stay on course for now.
