Alibaba's (BABA 0.27%) stock dropped 5% after it posted its latest earnings report on May 18. For the fourth quarter of fiscal 2023, which ended on March 31, the Chinese e-commerce and cloud leader's revenue rose 2% year over year to 208.2 billion yuan ($30.3 billion) and surpassed analysts' expectations by $410 million. Its adjusted net income increased 38% to 27.4 billion yuan ($4.0 billion), or $1.56 per American depositary share (ADS), and also cleared the consensus forecast by $0.21.
For the full year, Alibaba's revenue and adjusted earnings per ADS grew 2% and 4%, respectively. Should investors buy Alibaba's stock, which has plummeted more than 70% from its all-time high in October 2020, as a value play on China's COVID-19 recovery? Or will this bellwether of the Chinese tech sector remain out of favor for the foreseeable future?
Image source: Alibaba.
Why did the bulls retreat from Alibaba stock?
Alibaba's downfall was caused by regulatory, competitive, and macro headwinds. In September 2021, China's antitrust regulators hit Alibaba with a record $2.8 billion fine, forced it to end its exclusive deals with merchants and aggressive promotions, and closely scrutinized its previous and planned investments. Those penalties eroded Alibaba's defenses against JD.com, Pinduoduo, and other e-commerce marketplaces across China.
On the macro front, China's economic slowdown and intermittent COVID lockdowns broadly curbed consumer spending. Those headwinds also forced companies to rein in their spending on Alibaba's cloud services. Its cloud business also suffered a major setback in 2021 when ByteDance, bowing to overseas pressure, moved the data of TikTok's overseas users from Alibaba Cloud to Oracle's cloud servers.
In fiscal 2023, Alibaba generated 67% of its revenue from its China Commerce segment, which houses Tmall, Taobao, and its brick-and-mortar stores. Another 9% came from Alibaba Cloud, which remains the largest cloud platform in China. Here's how these two core businesses fared over the past two years.
|
Segment |
FY 2022 |
FY 2023 |
|---|---|---|
|
China Commerce Revenue Growth |
18% |
(1%) |
|
Cloud Revenue Growth |
23% |
4% |
|
Total Revenue Growth |
19% |
2% |
Data source: Alibaba.
That slowdown drove a lot of investors away from Alibaba. But on the bright side, Alibaba's operating margin expanded from 8% in fiscal 2022 to 12% in fiscal 2023, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin increased from 19% to 20%. That expansion was driven by about 19,000 layoffs throughout calendar 2022, as well as other aggressive cost-cutting measures.
NYSE: BABA
Key Data Points
What are Alibaba's plans for the future?
Back in March, Alibaba revealed its plans for the future by splitting its business into six new groups: Cloud Intelligence, Taobao Tmall Commerce, Local Services, Cainiao Smart Logistics, Global Digital Commerce, and the Digital Media and Entertainment Group. All six groups will be led by different CEOs, and most of them will either pursue fresh funding or IPOs.
Alibaba provided an update to that plan with its fourth-quarter report. It will spin off its entire cloud division in an IPO, and it will distribute those shares to its current shareholders as a special dividend. It also plans to pursue external financing for its global e-commerce division (which includes its overseas and cross-border marketplaces) while exploring potential IPOs for Cainiao Smart Logistics and the grocery division of its Taobao Tmall Commerce Group.
But that doesn't mean Alibaba is splitting itself up. Alibaba will still hold majority stakes in all of those groups, even if they are spun off into publicly traded companies. The restructuring strategy will merely free up its business groups to pursue more external financing -- which should alleviate some pressure from Alibaba's own balance sheet -- and make their own decisions without fretting over how they might impact Alibaba's other divisions.
For example, Alibaba generated all of its operating profits from its China Commerce division in fiscal 2023. All of its other businesses posted operating losses, which puts a lot of pressure on Alibaba to subsidize its unprofitable businesses with its higher-margin commerce revenues. Spinning off its less-profitable divisions could gradually resolve that issue.
Is Alibaba too cheap to ignore?
Alibaba didn't provide any exact guidance for fiscal 2024, but its growth could accelerate again as China's economy finally experiences its post-COVID recovery. The spinoff of Alibaba Cloud could also generate fresh cash and boost its profits.
Analysts believe Alibaba's revenue and adjusted EBITDA will grow 10% and 9%, respectively, in fiscal 2024. Based on those estimates, which we should take with a grain of salt, Alibaba's stock seems cheap at two times this year's sales and 10 times its adjusted EBITDA. However, it could remain out of favor until its revenue growth accelerates again and the delisting threats for U.S.-listed Chinese stocks are resolved. Alibaba is worth keeping an eye on, but it's not a screaming bargain yet.
