Could Alibaba Stock Help You Become a Millionaire?

Alibaba's (BABA 0.59%) stock price sank 6% on Feb. 7 after the Chinese e-commerce and cloud leader posted its latest earnings report. For the third quarter of fiscal 2024, which ended on Dec. 31, its revenue rose 5% year over year to 260.35 billion yuan ($36.67 billion) and beat analysts' estimates by $270 million. Its adjusted earnings per ADS dipped 2% to $2.67 but cleared the consensus forecast by $0.03 per share.

Alibaba's headline numbers weren't disastrous, but it's still struggling to revive its core e-commerce and cloud businesses. However, its stock trades just 8% above its IPO price and looks dirt cheap at 10 times next year's earnings. So if you take a contrarian view and invest $10,000 in Alibaba today, could it make you a millionaire over the next 20 years?

Image source: Getty Images.

What happened to Alibaba?

When Alibaba's stock hit its all-time high in October 2020, its Chinese e-commerce marketplaces (Taobao and Tmall) and cloud platform were firing on all cylinders. From fiscal 2015 to fiscal 2020 (which ended in March 2020), its revenue increased at a compound annual growth rate (CAGR) of 46% as its net income rose at a CAGR of 42%.

Alibaba's revenue climbed 41% in fiscal 2021, but its net income only inched up 2% after China's antitrust regulators levied a record $2.75 billion fine against the company. The regulators also barred Alibaba's e-commerce marketplaces from locking in merchants with exclusive deals, using aggressive loss-leading promotions, and making unapproved investments.

Those new restrictions -- along with fierce macro headwinds and intense competition from PDD (PDD 2.80%) and JD.com -- curbed the growth of Alibaba's Chinese e-commerce platforms and drove it to expand its overseas marketplaces (Lazada in Southeast Asia, Trendyol in Turkey, and its AliExpress cross-border marketplace) to diversify its e-commerce business away from China.

But as Alibaba's e-commerce sales cooled off, its cloud segment also faced tougher challenges. The macro headwinds forced many companies to rein in their spending on cloud services; it faced stiff competition from Huawei, Tencent, and Baidu; and it lost major customers like ByteDance (TikTok's parent company) amid the intensifying trade and tech war between the U.S. and China.

When will Alibaba turn a corner?

Faced with those challenges, Alibaba's revenue only increased 19% in fiscal 2022 and 2% in fiscal 2023. To cope with that slowdown, the company restructured itself into six new units, cut costs, and focused on expanding its higher-growth segments. But as the following table illustrates, Alibaba's core businesses continued to struggle over the past year.

Data source: Alibaba. YOY = year over year. RMB terms.

Taobao and Tmall, which accounted for 48% of its revenue in the first nine months of fiscal 2024, struggled as PDD's Pinduoduo peeled away its domestic shoppers. Alibaba's Cloud Intelligence segment, which generated 11% of its sales, also expanded at a sluggish pace as it "proactively" reduced its exposure to its lower-margin industries and customers.

Alibaba's International Digital Commerce business, which produced 10% of its revenue, is still growing rapidly but remains deeply unprofitable. Its Local Services and Digital Media divisions also stayed unprofitable over the past year, while its Cainiao segment finally turned a profit after it implemented some aggressive cost-cutting measures.

Could Alibaba generate millionaire-making gains?

Simply put, Alibaba needs its profitable Taobao/Tmall and Cloud Intelligence segments to grow again and subsidize the expansion of its unprofitable businesses. Unfortunately, China's economic slowdown and the difficult competitive environment could hamper its chances of a near-term recovery. The recent expansion of its buyback plan by $25 billion also suggests it's running out of ways to boost its revenue through shrewd investments or acquisitions.

Assuming Alibaba's valuations remain unchanged, it would need to increase its revenue and earnings at a CAGR of 26% over the next 20 years to turn a $10,000 investment into $1 million. Those growth rates might have seemed achievable in the past, but they could be nearly impossible to attain as its core e-commerce and cloud businesses face daunting macro, regulatory, and competitive challenges.

From fiscal 2023 to fiscal 2026, analysts expect Alibaba's revenue to rise at a CAGR of just 8% as its net income increases at a CAGR of 27%. Those growth rates are stable, but investors looking for a higher-growth Chinese e-commerce play with millionaire-making potential should take a closer look at PDD instead of betting on Alibaba's recovery.