Alibaba‘s (NYSE: BABA) stock price dropped by 6% on Feb. 7 following the release of its latest earnings report for the third quarter of fiscal 2024, which concluded on Dec. 31, detailing a 5% year-over-year rise in revenue to 260.35 billion yuan ($36.67 billion). This surpassed analysts’ estimates by $270 million. Meanwhile, its adjusted earnings per ADS dipped by 2% to $2.67 but exceeded the consensus forecast by $0.03 per share.
Despite respectable figures, the Chinese e-commerce and cloud giant continues to grapple with the struggle to resuscitate its core e-commerce and cloud businesses. However, its stock, trading only 8% above its IPO price and at a modest 10 times next year’s earnings, presents an appealing bargain. Posing an enticing query: could a $10,000 investment in Alibaba today potentially burgeon into a million-dollar fortune over the following two decades?
Image source: Getty Images.
Lost at Sea: The Alibaba Plight
In October 2020, Alibaba’s stock ascended to an all-time high while its Chinese e-commerce marketplaces, namely Taobao and Tmall, and cloud platform were triumphantly on an upward trajectory. Between fiscal 2015 and fiscal 2020, its revenue flourished at an annual growth rate of 46%, matching an equally impressive 42% growth rate in net income.
The shimmer began to dim in fiscal 2021, as the company’s revenue climbed by 41%, but net profit merely nudged up by 2% due to a record $2.75 billion fine imposed by China’s antitrust regulators. Simultaneously, Alibaba’s e-commerce activities were shackled with restrictions, leading the company to diversify its e-commerce business beyond China, venturing into overseas marketplaces such as Lazada in Southeast Asia, Trendyol in Turkey, and the AliExpress cross-border marketplace.
As the fervor of its e-commerce sales waned, its cloud segment also encountered formidable challenges, including macro headwinds and aggressive competition, pushing it to cut back on expenditure.
Seeking the Light: Alibaba’s Quest for Redemption
Confronted with these adversities, Alibaba’s revenue showed modest growth: 19% in fiscal 2022 and 2% in fiscal 2023. To cope with this deceleration, the organization revamped itself into six new units, pruning costs and concentrating on bolstering its high-growth segments. Nevertheless, Alibaba’s core businesses continued to grapple over the past year.
|
Revenue Growth by Segment (YOY) |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|
|
Taobao and Tmall |
12% |
4% |
2% |
|
International Digital Commerce |
41% |
53% |
44% |
|
Cloud Intelligence |
4% |
2% |
3% |
|
Cainiao Smart Logistics |
34% |
25% |
24% |
|
Local Services |
30% |
16% |
13% |
|
Digital Media and Entertainment |
36% |
11% |
18% |
|
Total |
14% |
9% |
5% |
Data source: Alibaba. YOY = year over year. RMB terms.
Alibaba’s Taobao and Tmall, contributing to 48% of its revenue in the first nine months of fiscal 2024, struggled as PDD’s Pinduoduo siphoned off its domestic shoppers. Alibaba’s Cloud Intelligence segment, accounting for 11% of its sales, also progressed at a sluggish pace, choosing to “proactively” diminish exposure to lower-margin industries and customers.
Its International Digital Commerce business, providing 10% of its revenue, continued to grow rapidly but remained deeply unprofitable. The Local Services and Digital Media divisions also remained in the red, while its Cainiao segment finally eked out a profit following aggressive cost-cutting measures.
Alibaba: The Million-Dollar Equation
Essentially, Alibaba needs its profitable Taobao/Tmall and Cloud Intelligence segments to reclaim their growth trajectory and subsidize the expansion of less lucrative ventures. Unfortunately, a near-term recovery is jeopardized by China’s economic slowdown and cut-throat competitive landscape. The recent increase in its buyback plan by $25 billion suggests that Alibaba is exhausting avenues to augment its revenue through astute investments or acquisitions.
Assuming Alibaba’s valuations remain static, achieving a $10,000 investment to morph into $1 million over two decades necessitates a 26% CAGR in revenue and earnings. While such growth rates may have seemed within reach in the past, they now loom virtually unattainable as its core e-commerce and cloud businesses confront formidable macro, regulatory, and competitive challenges.
From fiscal 2023 to fiscal 2026, analysts anticipate Alibaba’s revenue to ascend at a CAGR.
The Evolution of Alibaba Group
Alibaba Group, once a juggernaut of the Chinese e-commerce world, is now struggling to reclaim its lost glory. After experiencing exponential growth, the company now faces a daunting challenge—a growth rate of just 8% amidst a soaring net income CAGR of 27%. For investors seeking a high-growth Chinese e-commerce stock brimming with potential, a glance at Pinduoduo (PDD) might offer a more compelling alternative to betting on Alibaba’s recovery.
A Critical Crossroads
The current scenario raises questions about the efficacy of investing in Alibaba Group. Given the remarkable turnaround stories in the competitive landscape, is the company capable of summoning the spirit of reinvention?
Investment Considerations
Prior to diving into Alibaba Group’s stock, it’s pertinent to weigh the fact that the revered Motley Fool Stock Advisor analysts haven’t identified the company among their 10 best stocks for investors to consider in the current climate—a hint that the next monster returns might not trace back to Alibaba Group.
The Stock Advisor service, widely known for multiplying the S&P 500 return threefold since 2002*, offers a comprehensive blueprint for investment success, featuring regular analyst updates and two fresh stock selections each month.
The Path Ahead
Considering Alibaba Group’s history, the company is still an undisputed force to be reckoned with in the Chinese e-commerce sector. However, the burning question remains—can Alibaba Group navigate through the labyrinth of challenges and stage a triumphant resurgence?
As legendary as Alibaba Group’s journey has been, the road to recovery could be equally daunting. In an environment where disruptive innovation is the norm, Alibaba Group must now chart a new course, recalibrate its strategy, and rediscover its entrepreneurial zeal to pave the way for future triumphs.
*Stock Advisor returns as of February 6, 2024
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu, JD.com, and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
