The Stormy Forecast for Alibaba Stock

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By Ronald Tech


The Rise and Fall

Unraveling the twist of Alibaba’s fortunes reveals a saga of triumphs and tribulations. At the pinnacle of its power in October 2020, the e-commerce titan stood unassailable, riding the crest of success on the strength of its Chinese marketplaces, Taobao and Tmall, and its flourishing cloud platform. During the period from fiscal 2015 to 2020, the revenue soared at a CAGR (compound annual growth rate) of 46%, while net income ascended at 42% CAGR. It was a heady time, indeed.

However, Alibaba’s majestic ascent was not fated to endure. Despite a hefty 41% revenue surge in fiscal 2021, a mere 2% rise in net income ensued, due to a hefty $2.75 billion fine imposed by China’s antitrust regulators. The blow delivered by the formidable regulators dampened the company’s spirits, causing a staggering tumble in profitability. This was only the beginning of a series of dominoes that would fall, imploding its growth trajectory and prospects of dominance.

Adding to this conundrum, Alibaba faced an onslaught of macro headwinds and relentless competition from PDD and JD.com. These factors collectively stymied the growth of its Chinese e-commerce platforms, nudging the company toward an expansion of its overseas marketplaces, such as Lazada in Southeast Asia, Trendyol in Turkey, and the AliExpress cross-border marketplace.

Yet, as Alibaba’s e-commerce momentum waned, its cloud segment, a crucial pillar in its grand edifice, encountered a string of trials and tribulations. The cumulative impact of macro headwinds, cutbacks in corporate cloud service spending, and formidable competition from the likes of Huawei, Tencent, and Baidu wreaked havoc on its territory. Furthermore, the loss of major customers, including ByteDance, in the escalating trade and tech war between the U.S. and China, only further augmented the perils faced by the behemoth.

A Glimmer of Hope?

For Alibaba, fiscal 2023 held meager promise, with revenue peaking a paltry 2% on the growth chart. To navigate this formidable storm, the company initiated a strategic restructuring into six new units, implemented cost-cutting measures, and honed its focus on expanding higher-growth sectors. Despite these measures, the company’s core businesses continued to grapple with adversity.

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.

The table above paints a dim picture of the company’s trajectory. Taobao and Tmall, contributing 48% of its revenue in the first nine months of fiscal 2024, floundered as PDD siphoned off domestic shoppers. The Cloud Intelligence segment, accounting for 11% of its sales, faced sluggish expansion as it “proactively” reduced its exposure to lower-margin industries and customers. Alibaba’s International Digital Commerce business, providing 10% of its revenue, soared but remained deeply submerged in unprofitability. Moreover, its Local Services and Digital Media divisions remained entrenched in unprofitability, with its Cainiao segment finally turning a profit after implementing severe cost-cutting measures.

The Millionaire’s Dilemma

Is Alibaba still a candidate for a miraculous stock windfall? The company urgently needs its moneymaking segments – Taobao/Tmall and Cloud Intelligence – to regain traction and bear the heavy load of its unprofitable domains. However, an economic slowdown in China and fierce competitive pressure present formidable barriers to Alibaba’s restorative journey.

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Alibaba now faces a Sisyphean task. If valuations remain stagnant, the company would require a steep 26% CAGR in revenue and earnings over the next 20 years to transform a $10,000 investment into $1 million. However, soaring growth rates face a gauntlet of challenges, such as daunting macro, regulatory, and competitive headwinds, encroaching upon both its core e-commerce and cloud domains.

The Chinese E-commerce Chess Match: Alibaba Group vs. Pinduoduo

Alibaba Group’s Struggles Amidst Pinduoduo’s Growth

Alibaba Group, one of the behemoths of Chinese e-commerce, has been grappling with regulatory challenges, leading to stagnant returns in recent times. Contrary to its position, its smaller but nimbler rival, Pinduoduo (PDD), has been experiencing meteoric growth, leaving investors to ponder which avenue may lead to greater success.

Decoding the Numbers

Despite Alibaba Group’s enviable size, its stock has yielded a lackluster 8% return even as its net income maintains a steady Compound Annual Growth Rate (CAGR) of 27%. These growth rates might appear stable, but for investors eying a higher-growth prospect in the Chinese e-commerce arena, Pinduoduo could be the uncharted territory worth exploring.

The Allure of Pinduoduo

While many traditional investors may be inclined to pin their hopes on Alibaba Group’s recovery, the allure of Pinduoduo lies in its potential to become a transformative force akin to Amazon. Pinduoduo’s ascendancy, characterized by dynamic growth rates and significant market traction, has piqued the curiosity of investors in search of the next big breakthrough in e-commerce.

The Investor’s Dilemma

Amidst conflicting narratives, it’s imperative to pause and weigh the investment landscape. Should an investor cast their lot with the established blue-chip magnate, Alibaba Group, as it navigates through stormy waters? Or, is it more prudent to take a leap of faith with Pinduoduo, betting on its potential to emulate the rise of Amazon?

Seeking Guidance

As investors grapple with this conundrum, it is crucial to seek advice from trusted sources. The Motley Fool, a reputable bastion of investment wisdom, recently omitted Alibaba Group from its esteemed list of the “10 Best Stocks to Buy Now.” While Alibaba Group’s omission from the list may raise eyebrows, it also speaks volumes about the potential of alternate investment avenues, such as Pinduoduo.

Stock Advisor: A Beacon for Investors

Stock Advisor, the acclaimed publication from The Motley Fool, serves as a guiding light for investors desiring clarity amidst a sea of investment options. The publication’s track record, having tripled the return of the S&P 500 since 2002, underscores its credibility as a trusted source of investment insights.

Final Food for Thought

While Alibaba Group’s saga unfolds and Pinduoduo’s star continues to ascend, investors are left with a tantalizing choice that could potentially shape their financial destinies. It ultimately boils down to a daring game of expectation versus reality, as investors weigh the promise of an Alibaba renaissance against the allure of Pinduoduo’s ascent in the Chinese e-commerce arena.

*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.