Alibaba Stock: Bear vs. Bull

Alibaba (BABA 0.59%) posted its latest earnings report on Aug. 10. For the first quarter of fiscal 2024, which ended on June 30, the Chinese e-commerce and cloud leader's revenue rose 14% year over year to 234.2 billion yuan ($32.3 billion) and beat analysts' estimates by $1.1 billion. Its adjusted net income grew 48% year over year to 44.9 billion yuan ($6.2 billion), or $2.40 per ADS, which also cleared the consensus forecast by $0.39.

Does that earnings beat indicate it's safe to buy Alibaba stock again? Let's weigh the bullish and bearish cases to decide.

Image source: Alibaba.

The key numbers on Alibaba

Alibaba restructured its business into six new business groups -- Taobao and Tmall, Alibaba International Digital Commerce, Cloud Intelligence, Cainiao Smart Logistics, Local Services, and Digital Media and Entertainment -- earlier this year.

Each group was led by a new CEO and encouraged to pursue its own funding from external investors or launch new IPOs. That new structure enabled each group to expand without worrying about how their finances affected the other groups. It was also aimed at appeasing antitrust regulators by reducing the perceived synergies between Alibaba's retail, cloud, and digital media divisions.

It started to report its results from these segments separately in the first quarter of fiscal 2024:

Data source: Alibaba. YOY = Year-over-year. RMB terms. EBITA = earnings before interest, taxes, and amortization. pp = percentage points.

What the bulls saw in Alibaba's report

The bulls will point out that Alibaba's revenue growth accelerated from its 2% growth in the fourth quarter of fiscal 2023. It also marked its first quarter of double-digit sales growth since the third quarter of fiscal 2022 (which ended in December 2021).

The growth of its international digital commerce business (which includes the Southeast Asian marketplace Lazada, the Turkish marketplace Trendyol, and its cross-border marketplace AliExpress) offset the slower growth of Taobao and Tmall in China. The international segment's adjusted EBITA margins -- while negative -- are also improving.

Alibaba Cloud's growth remains constrained by the macro headwinds for enterprise spending, but its margins are still improving. Cainiao also continues to grow at a healthy clip as it expands overseas and provides its services to more third-party customers. Both of those groups will be spun off in IPOs in the near future.

The Local Services group, which includes the home delivery portion of its food delivery app Ele.me and the sponsored navigation portion of its digital mapping platform Amap, is also recovering and narrowing its losses as China ends its zero-COVID lockdowns. The Digital Media segment also finally turned profitable on an adjusted EBITA basis as it streamlined its spending, launched a few hit movies through Alibaba Pictures, and benefited from the rebound in consumer spending related to the pandemic easing.

All of those improvements suggest that Alibaba's business is finally recovering from all of the regulatory, macroeconomic, and competitive headwinds which caused it to generate just 2% revenue growth in fiscal 2023. Analysts expect its revenue and net income to rise 10% and 73%, respectively, this year. Those are impressive growth rates for a stock that trades at just 14 times forward earnings.

What the bears think will happen to Alibaba

The bears will tell you that Alibaba's core Chinese commerce business -- which revolves around Taobao, Tmall, and its Freshippo brick-and-mortar stores -- is still growing at a slower rate than its nimbler rival Pinduoduo (PDD 2.80%), which grew its revenue 58% year over year in the first quarter of 2023. That's likely because China's antitrust restrictions against Alibaba -- which bar it from locking in merchants with exclusive deals and using aggressive promotions to gain new customers -- are still eroding its defenses against Pinduoduo, JD.com, and other Chinese marketplaces.

Alibaba's planned spin-off of Freshippo's lower-margin stores in yet another IPO might stabilize the Taobao and Tmall group's margins, but it could still face tough competitive headwinds. Its international e-commerce business could also struggle to turn profitable as it competes against Sea Limited's Shopee in Southeast Asia and rapidly growing cross-border marketplaces like Pinduoduo's Temu and Shein.

Alibaba's new strategy of spinning off its lower-margin businesses in IPOs might reduce their impact on its own operating margins, but it will likely retain majority equity stakes in those new companies. Therefore, those investments could still reduce their net profits if they fail to impress the market. Lastly, Alibaba still faces unresolved delisting threats in the U.S. -- and those concerns could continue to compress its near-term valuations.

Which argument makes more sense?

Alibaba hasn't resolved all of its problems yet, but the bullish thesis makes more sense than the bearish one right now. As China's macro environment improves, Alibaba's growth should stabilize -- and its low valuations should bring back the bulls.