Alibaba (BABA 0.73%) was once considered a promising play on China's long-term growth. It owned the country's two largest e-commerce marketplaces, Taobao and Tmall; its largest public cloud infrastructure platform, Alibaba Cloud; and a broad range of other retail, digital media, and gaming businesses.
But over the past five years, Alibaba's stock declined nearly 60% and broadly underperformed many other Chinese tech stocks. Let's see why Alibaba lost its luster -- and if its stock will bounce back over the next five years.
Image source: Alibaba.
What happened over the past five years?
Alibaba's stock price has been tumbling, but its business has still expanded over the past five years. Between fiscal 2018 and 2023 (which ended this March), its annual revenue expanded at a compound annual growth rate (CAGR) of 28% while its adjusted net income increased at a CAGR of 11%. But as the following table illustrates, its growth has been decelerating at an alarming rate over the past two years.
|
Metric |
FY 2018 |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|---|---|---|
|
Revenue Growth |
58% |
51% |
35% |
41% |
19% |
2% |
|
Adjusted Net Income Growth |
44% |
12% |
42% |
30% |
(21%) |
4% |
Data source: Alibaba.
That slowdown was caused by two main headwinds. First, China's antitrust regulators slammed Alibaba with a record $2.8 billion fine in 2021, then forced its e-commerce division to end its exclusive deals with merchants and rein in its loss-leading promotions. Those tighter restrictions eroded Alibaba's defenses against competitors JD.com and Pinduoduo in China's cutthroat online retail market.
Second, China suffered a severe economic slowdown throughout the pandemic, and its recovery was delayed by intermittent "zero COVID" lockdowns throughout 2022. Those macro headwinds broadly curbed consumer spending across its e-commerce platforms, while throttling enterprise spending on its cloud infrastructure services.
NYSE: BABA
Key Data Points
Streamlining its business with fresh spin-offs
Alibaba's regulatory, macro, and competitive challenges drove it to take drastic steps to streamline its business. This March, it split its sprawling 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 of those groups will led by different CEOs, and they'll be allowed to pursue fresh funding from external investors or list their shares through IPOs.
During its fourth-quarter conference call in May, Alibaba said it would spin off its Cloud Intelligence group with an IPO over the next 12 months. Alibaba's current investors will receive shares of that new company through a stock dividend distribution. It's also been exploring potential IPOs for its Cainiao logistics division and Global Digital Commerce group, which houses its cross-border marketplace AliExpress, Southeast Asian marketplace Lazada, and Turkish marketplace Trendyol.
Alibaba will still maintain controlling equity stakes in all those companies, but the IPOs could raise fresh cash while removing their expenses from the company's bottom line. The new companies can also ramp up their spending without worrying about how their expenses impact Alibaba's other businesses.
Therefore, Alibaba's overall margins could improve as it spins off its lower-margin cloud, logistics, and cross-border commerce divisions, and those business could expand faster without being micromanaged by Alibaba. If those new companies thrive, Alibaba's investment portfolio could blossom and boost its net profits. Those spin-offs could also appease the antitrust regulators by diluting the synergies between its e-commerce, cloud, and media businesses.
What could happen over the next five years?
Those spin-offs could gain a lot of attention from investors over the next five years, but Alibaba's reported growth should also stabilize as the macro environment improves and its core markets expand. According to eCommerceDB, China's e-commerce market could still grow at a CAGR of 12% between 2023 and 2027, while Reportlinker expects China's cloud computing services market to expand at a CAGR of 21% between 2022 and 2030.
Analysts expect Alibaba's revenue to grow at a CAGR of 9% from fiscal 2023 to 2025, and for its net income to increase at a CAGR of 30% as it spins off more of its subsidiaries and reins in its spending. We should take all of those estimates with a grain of salt, but they suggest that fiscal 2023 might have been the bottom of Alibaba's current growth cycle.
If Alibaba meets those analysts' expectations and continues to grow its revenue and net income at a relatively modest CAGR of 10% from fiscal 2025 to fiscal 2028, it could potentially generate about 1.37 trillion yuan ($190 billion) in revenue and 165 billion yuan ($23 billion) in net income by the final year. That would be 58% more revenue and 128% more net income than the company generated in fiscal 2023.
So even if Alibaba's valuations stay at their current levels, its stock could easily double within the next five years. However, a new bull market and a resolution of the delisting threats against U.S.-listed Chinese stocks could all lift its valuations to even higher levels. Simply put, I wouldn't be too surprised if Alibaba's stock triples -- or more -- by fiscal 2028.
