Alibaba's (BABA +0.82%) stock stayed nearly flat this year, even after the company's latest quarterly report in August easily cleared Wall Street's expectations.
The bears are still convinced its high-growth days are over as it faces a wall of macro, competitive, and regulatory challenges. The bulls believe it's undervalued and its growth will eventually accelerate as those headwinds dissipate. But these three red flags suggest its turnaround won't happen anytime soon.
Image source: Alibaba.
1. Daniel Zhang's abrupt departure
Daniel Zhang took the helm as Alibaba's CEO in 2015. After Alibaba announced it would restructure its sprawling business into six new divisions earlier this year, Zhang said he would step down as the group's chairman and CEO but remain as the CEO of the newly formed Cloud Intelligence division. Alibaba also said it would spin off the cloud division as a stand-alone company via an IPO before May 2024.
On Sept. 10, Eddie Wu succeeded Zhang as Alibaba Group's CEO. Alibaba's co-founder Joseph Tsai also replaced Zhang as the company's chairman. Those two transitions had been scheduled, but Zhang also unexpectedly quit the cloud business and handed the reins to Wu.
That abrupt decision raised bright red flags for Alibaba Cloud as both a subsidiary of Alibaba and as a stand-alone business. The Cloud Intelligence unit's revenue only rose 4% year over year in Alibaba's latest fiscal year as China's economic slowdown, tighter software spending, and stiff competition from its smaller competitors -- including Huawei Cloud, Tencent Cloud, and Baidu AI Cloud -- curbed its growth. It remains profitable on an adjusted earnings before interest, taxes, and amortization (EBITA) basis, but it only maintained a slim adjusted EBITA margin of 2% last year.
Those uninspiring numbers, along with Zhang's sudden departure, suggest its upcoming IPO could bomb in its market debut. Analysts had expected Alibaba Cloud to be valued at up to $60 billion (nearly 6 times its sales in its latest fiscal year) upon its IPO, but its sluggish growth, macro headwinds, and regulatory challenges could significantly reduce that valuation.
NYSE: BABA
Key Data Points
2. Freshippo's postponed IPO
Alibaba initially planned to follow up the spinoff of its cloud business with an IPO for its Freshippo grocery division between November 2023 and May 2024. However, several recent reports suggest it will postpone that IPO after its estimated valuation of $4 billion fell short of the $6 billion to $10 billion range the company had been targeting.
Freshippo's spinoff would have removed its lower-margin brick-and-mortar grocery stores and online delivery business from the Taobao and Tmall Group, which generates most of its sales from those two higher-margin e-commerce platforms. It would have also enabled Freshippo to attract fresh funds from external investors, pursue its own investments, and grow its network of over 300 stores without fretting over how that expansion affected Alibaba's other business groups.
Unfortunately, the market's tepid interest in Freshippo's planned IPO suggests that investors recognize the possible benefits of a spinoff for Alibaba but have a low opinion of Freshippo's growth potential as a stand-alone company. That delay also casts some doubt on Alibaba's plans to spin off its other divisions -- including Cainiao Smart Logistics and its International Digital Commerce Group -- as stand-alone companies via fresh IPOs.
3. Murky plans for the future
In a recent internal memo to Alibaba's employees, CEO Eddie Wu said he would focus on expanding the company's ecosystem as an "AI-driven" business that aims to improve the user experience across all of its platforms. To maintain a "start-up mindset" and avoid being stuck in the "old ways," Wu plans to promote a lot of its younger employees.
Yet Wu's long-term plans are still vague. Nearly every tech and retail company has been extolling the benefits of AI technologies over the past year, but only a handful are generating meaningful revenue from that seismic shift.
It might be smart to focus on improving the user experience and bringing in fresh blood, but those moves might not widen its moat against hungry competitors like JD.com and Pinduoduo in the retail market. They also won't prevent China's regulators from carefully scrutinizing Alibaba's future investments or imposing more competitive restrictions on its e-commerce business. In other words, we still don't know if Wu can fill Daniel Zhang's shoes.
Is it the right time to buy Alibaba?
Alibaba's stock might seem cheap at 9 times forward earnings, but all of these new challenges could prevent investors from rushing back in. I believe its downside potential is limited, but it could be stuck in neutral unless Wu proves he can continue to steer Alibaba in the right direction while keeping its planned IPOs for the Cloud Intelligence and Freshippo groups on track. So for now, I'd stick with other blue-chip tech stocks until we get a clearer view of Alibaba's future.
