Alibaba (NYSE:BABA) (9988:HK) is a Chinese e-commerce company. Over recent years, it has also been building its capability in cloud computing and the fintech space, with the most prominent one being Ant Group.
Alibaba’s stock price has risen steadily since its first public offering, thanks to its increasing revenue and promising future prospects.
However, things changed in October 2020, when the government cracked down on these Chinese tech behemoths. Alibaba was hit with a slew of penalties and warnings as a result of the Chinese government’s crackdown. Ant Financial was forced to restructure, and Alibaba received a record $2.8 billion fine from antitrust authorities in April. To add insult to its injury, Alibaba was the first company to be hit by almost every single facet of the widespread tech sector regulatory crackdown.
Lately, the financial impact from the regulatory crackdown coupled with China persisting on a zero-covid policy has started to show up in the financial performance of recent quarters. Alibaba’s share price fell as much as 75% to a recent low of HK$71 (9988:HK).
As of June 2022, China’s regulatory crackdown seems to be coming to an end and many of the big China stocks including Alibaba have rebounded from their lows.
So, is BABA is buy or sell now? Let’s explore their prospects in this article:
Alibaba’s Business Overview – what do they do?
Alibaba Group was founded in 1999 by Jack Ma. Today, it is one of the biggest e-commerce companies in the world, with over 50% of China’s e-commerce market share.
In total, Alibaba’s core commerce business makes up 87% of the total company revenue from its range of sub business like Taobao, Tmall, AliExpress, Lazada, Cainiao and many more.
Other than e-commerce, Alibaba has been investing heavily in its Cloud Computing business. As of FY2021, its cloud computing segment makes up 8% of the companies total revenue.
The remaining 5% comes from:
- its Digital media and entertainment segment,
- Innovation initiatives and
- Others.
The stages of each segment are seen in the diagram below. As depicted on the image, the larger the size of the tree shows, the more profitable the segment is.
You can probably tell that Alibaba is a huge company with many different business segments. Overall, it can be categorised into four business segments and another two investment segments. These are:
- Core Commerce,
- Cloud Computing,
- Digital Media & Entertainment,
- Innovation Initiatives & others,
- Ant Group and,
- Strategic investments.
Let us break it down and learn more about each segment.
Core Commerce (Taobao, Tmall, AliExpress, Lazada, 1688.com and many more)
Making up the bulk of Alibaba revenue and profit is its core commerce, which comprises TaoBao, TMall, AliExpress and many more. This segment has many subsegments:
China
- TaoBao (C2C)
TaoBao is a Consumer to Consumer e-commerce platform which allows small business and individuals to sell their products to consumers in mainland China, Hong Kong, Macau and Taiwan.
- Tmall (B2C)
Tmall is made up of two parts: Tmall China and Tmall Global.
Tmall China was launched in 2008 as a business to consumer (B2C) e-commerce platform. It mainly allows businesses with an offline presence in China to sell their products to Chinese consumers. This is a stark contrast from TaoBao, as only recognized companies like Nike can sell their products here.
Tmall Global, on the other hand, was launched in 2014 and also functioned like Tmall China. The only difference is that foreign brands without a physical presence in China can list their products. Currently, it is the largest Chinese cross border e-commerce platform with over one-third of the market shares.
- Kaola.com
Acquired in 2019, Kaola.com primarily serves as an online marketplace for Chinese consumers to buy imported products. We can see Kaola.com as an extension to Tmall.
- Cainiao
Formed in 2013 through a partnership with six other Chinese logistics companies, Cainiao primarily serves as Alibaba’s logistics arm.
With its logistics infrastructure globally, Cainao is increasingly being adopted by Alibaba’s merchants across its various e-commerce platforms. For FY2021, Cainiao has achieved revenue growth of 68% year on year and represented 5% of Alibaba’s total revenue and has turned cash flow positive this year.
- Ele.me & Koubei
Acquired in 2018, ele.me is an on-demand delivery platform in China that allows consumers to order food and groceries online. In addition, it also provides last-mile logistics services, which include delivery services for Freshippo and Alibaba Health.
Meituan is still the market leader in food delivery services with over 65% of China market share. Nonetheless, ele.me still has a commanding 27.4% market share, putting it in second place.
Kuobei, on the other hand, is one of China’s leading restaurant and local services guide platforms for in-store consumption.
- Freshippo
Known as ‘Hema’ in Chinese, it is a chain of self-operated retail shops (Similar to Amazon Go) that offers zero human touch shopping experience. As of March 31, 2021, 257 Freshippo stores are running, which are primarily located in tier one and tier two cities across China.
International
- Lazada
Acquired in 2016, Lazada primarily serves the South East Asian market and is currently one of the largest e-commerce players in SEA. While Lazada has had triple-digit year-on-year order growth, it is worth noting that it has recently lost ground to SEA group‘s shoppee, which has done exceptionally well thanks to its localized marketing efforts.
Nonetheless, Lazada is still in second place, ahead of Tokopedia, with over 100 million monthly active users.
- AliExpress
AliExpress, launched in 2010, is a global marketplace enabling consumers to buy directly from manufacturers and distributors, primarily in China.
Cloud Computing
- Alibaba Cloud
Alibaba Cloud offers a suite of cloud services to its customers globally. These services include data storage, large-scale computing, security, big data analytics, machine learning platform and IoT services.
In terms of market share, Alibaba Cloud comes in at fourth place with a market share of 6%, just below Amazon, Microsoft and Google. In its home market, Alibaba cloud takes to lead with over 39.8% market share.
Alibaba Cloud’s revenue increased by 50% year over year to US$9,176 million in FY2021, and the company became cashflow positive for the first time. This increase can be ascribed to the Covid-19 pandemic as well as general digitization tendencies. Moving forward, with the Chinese government’s strategic priority in cloud computing, I believe Alibaba Cloud will grow immensely.
Digital Media & Entertainment
- Youku, Alisports, AliGame, UC etc.
This segment makes up a small part of Alibaba’s revenue.
Acquired in 2016, Youku is the third-largest online long-form video platform, which has over 500 million monthly active users. Apart from providing digital media and entertainment content to its users, Youku serves to complement Alibaba’s e-commerce business through its membership program and also as a medium for live streaming of major events of its core commerce like the 11.11 global shopping festival.
Its main competitors are iQIYI and Tencent Video.
Innovative Initiatives
- Amap, DingTalk, etc.
This segment is like a ‘startup’ arm of Alibaba, and most if not all initiatives are still unprofitable. Nonetheless, if Alibaba manages to find 1 or 2 gems, it could potentially be a 10x bagger.
Currently, Alibaba is working on initiatives like Amap and DingTalk. Amap is a mobile digital map that provides navigation and real-time traffic information in China. Its big data-enabled technology helps power major mobile apps across different industries, including ride-hailing and social networking.
DingTalk is a digital collaboration workplace that offers new ways of working, sharing and collaborating in schools and offices. It allows users to stay connected while working remotely, which is crucial given the pandemic now.
Ant Group
Ant Group is a fintech company that provides a range of financial services like its payment services, Alipay, which is well integrated into its e-commerce platform. To put its size into perspective, Ant group’s active user is about two times that of of Paypal’s, with a global annual active users of 1.3 billion.
Due to regulatory issues, Ant Group had to split from its parent company. As such, it now forms the investment part of Alibaba which holds a 33% equity stake in the company.
Other than that, Ant Group also partners with financial institutions to offer wealth management products, micro-financing and insurance products.
While Ant Group has taken a massive hit after its IPO was halted, there is still a lot of growth coming from this segment. With the growing middle income and its investment in the commercial applications of blockchain, AntGroup has a long runway ahead for it.
Strategic Investments
- Didi, Bilibili, etc.
Apart from its own business, Alibaba has also invested in other companies, with the two most notable ones being Bilibili (8% ownership) and Didi Chuxing.
Alibaba’s financial results (FY22)
| P&L in RMB’m | FY22 | FY21 | Mar’22 | Dec’21 | Mar’21 | Variance (%) | Variance (%) |
| EPS in RMB’$ | FY22 vs FY21 | Mar’22 vs Mar’21 | |||||
| Revenue | 853,062 | 717,289 | 204,052 | 242,580 | 187,395 | 18.9% | 8.9% |
| Income (loss) from operations | 69,638 | 89,678 | 16,717 | 7,068 | -7,663 | -22.3% | -318.2% |
| Adjusted EBITDA | 158,205 | 196,842 | 23,373 | 51,364 | 29,898 | -19.6% | -21.8% |
| Adjusted EBITDA margin | 19% | 27% | 11% | 21% | 16% | -29.6% | -31.3% |
| Earnings per HK share | 2.84 | 6.84 | -0.76 | 0.94 | -0.25 | -58.5% | 204.0% |
| Non-GAAP earnings per HK share | 6.59 | 8.14 | 0.99 | 2.11 | 1.29 | -19.0% | -23.3% |
| Key Metrics: | |||||||
| Annual active consumers (China Commerce) | 1,004.0 | 811.0 | 1,004.0 | 979.0 | 811.0 | 23.8% | 23.8% |
| Annual active consumers (Total) | 1,309.0 | 1,131.0 | 1,309.0 | 1,280.0 | 1,131.0 | 15.7% | 15.7% |
Alvin also shared his thoughts on Alibaba’s FY22 report:
Post report reactions
Alibaba’s share price made a strong move of nearly than 15% as its performance exceeded lowered market expectations. It delivered much slower growth and lower profits in FY22 as the preceding twelve months was a challenging period in which the company had to embrace changes and implement measures required by the various regulatory bodies while providing support as part of the zero-covid policy, similar to other large Chinese tech companies.
Weak Revenue Growth and mounting cost pressures
On a FY basis, Total Revenue increased by 19% while adjusted EBITDA decreased by 20%. 4Q22 revenue growth was merely 9% while adjusted EBITDA decreased by 22%. This meant that for FY22, Alibaba saw weak revenue growth and also faced significant cost pressures.
On a FY basis, there was higher revenues across all segments, with slightly stronger growth from the international commerce, Cainiao and AliCloud. The growth was in line with Alibaba’s business objectives which focused on these three segments as mentioned on many previous occasions such as during their investor day.
The Digital media and entertainment segment was the clear underperformer and this was of no surprise since Alibaba made a RMB25.1 billion impairment for this segment last quarter.
On a FY basis, GAAP EPS and income from operations decreased by 59% and 22% respectively, mainly due to the decreases in the market prices of Alibaba’s equity investments in publicly-traded companies, compared to net gains from these investments last year. Non-GAAP EPS which mainly excludes book value adjustments and share based compensation saw a 19% decline.
The decrease in Alibaba’s operational profitability metrics were due to continued increased investments in Taobao Deals and Taocaicai in its bid for user growth as well as due to its support for merchants amidst this challenging environment. Alibaba has previously communicated that by supporting its merchants, it hopes to build a sustainable long term relationship with these merchants.
Alibaba’s FY2023 guidance
Alibaba chose not to give an FY2023 guidance as it typically does mainly because its domestic businesses have been significantly affected by the COVID-19 resurgence in China. However, the management believes that Alibaba will continue to generate strong operating cash flow which will allow Alibaba to maintain strategic flexibility as it calibrates its operations against changing economic and competitive circumstances.
In FY2023, Alibaba has stated that its operating principles include focusing on sustainable, high-quality revenue growth and optimising its cost structure to enhance overall return.
3 Positive takeaways
1) Alibaba Cloud records EBITA profit
Alibaba Cloud’s full year profitability was clearly one of the key reasons for its strong share price performance. While FY revenue growth YoY was 23%, the YoY growth for the quarter was only 12%. The moderation in growth was due to declining revenue in internet verticals such as online education and entertainment. This is not surprising considering how other companies such as Tencent has seen revenue from this sector decline as well.
This weakness was due to the regulatory crackdown on these two internet verticals and was offset by growth in telecommunication, financial services, and retail.
Importantly, Alibaba’s Cloud segment revenue is becoming more diversified with revenue contribution from non- Internet industries at more than 50%.
2) Strong revenue growth in the international e-commerce segment
The international e-commerce segment which comprises e-commerce platforms such as AliExpress, Lazada and Trendyol saw a 26% YoY growth in annual active consumers (AACs) from 241 million to 305 million and a 13% YoY GMV growth from RMB 302 billion to RMB 341 billion. Lazada and Trendyol continued providing strong growth momentum and the overall positive performance was achieved amidst negatives such as a slowing export from China due to COVID-19 related supply chain disruptions, depreciation of the Turkish Lira and the logistics disruption from the Russia Ukraine Conflict.
3) China e-commerce is still growing and is contributing to China’s fight against COVID-19
Alibaba’s domestic e-commerce infrastructure has played a crucial role in supporting China’s battle for zero covid. Despite this, it was still able to grow as Alibaba surpassed 1 billion AAC in China during the quarter and the number overseas grew to 305 million. Alibaba’s China’s e-commerce gross merchandise value (GMV) hit a record RMB8 trillion for the fiscal year with a 2% growth despite challenges from competition and COVID-19.
The overall strength in its e-commerce was enabled by Cainiao as Alibaba continues to expand its international logistics network by strengthening its end-to-end logistics capabilities, including eHubs, line-haul, sorting centers and last-mile network International eHubs in Kuala Lumpur and Liege, which function as the customs clearance, warehousing and fulfilment centers for their respective regions, officially commenced operation in November 2021 and were already running at near full capacity in March 2022.
In China, Cainiao continues to scale its consumer logistics business by expanding its Cainiao Post network to improve consumer experience and delivery efficiency, and penetrate into less developed areas, which complements Alibaba’s China commerce businesses.
For example, in partnership with Taobao and Tmall businesses, Cainiao Post introduced additional value-added services (such as home delivery options for consumers) which have gained rapid adoption throughout China.
2 Negative Takeaways
1) Weak macroeconomic condition and heightening competition in China
China’s macroeconomic environment is also an immediate term risk factor for Alibaba with GDP growth forecasts being revised lower and China retail spend contracting in both the months of March and April 2022. On an overall basis, Alibaba noted low single-digit decline in revenue growth in April compared to the same period last year. Online physical goods GMV of its China retail marketplaces, saw a year-over-year decline in the low teens percentage in April.
It has also been clear that many of Alibaba’s domestic segment are in saturated or mature markets with competitors that are similarly well placed to compete.
2) Increased costs from operations and investment
It is also quite clear that Alibaba’s profit margin is shrinking. On the surface it looks like plenty of it could be attributed to longer term investment spending in areas such as data centers and hardware.
Due to lower profitability, the operating cashflows have weakened considerably while Alibaba continues to invest meaningfully in its cloud business and logistics fulfilment infrastructure.
While the broader narrative is to allow for Alibaba to grow, it is in actual fact, simply an attempt to remain competitive, Alibaba also had to spend more from an operations perspective to support its ecosystem in a bid to keep users engage and hopefully acquire additional users, however the key point is that it does not look like unit economics are improving in key major segments.
Will Alibaba recover?
Although Alibaba exceeded the street’s expectation, Alibaba’s FY22 results were clearly quite weak. While there was overall growth in FY22 with strong performance in core segments such as Cloud and e-commerce, it was clear that the full year performance was mainly due to a comparatively better 1H22 as 2H22 slowed down further due to the issues mentioned.
Alibaba did not feel comfortable enough to provide a FY23 guidance due to the uncertainty it currently faces as a consequence of the COVID-19 situation in China. In what could be lingering effects from the recent regulatory crackdown, the company worded its outlook carefully, focusing on sustainable revenue growth and costs optimisation.
Chinese Vice-Premier Liu He has made statements signalling further support for tech companies following his initial statement to regulators to adopt a standardised, transparent, and predictable approach in overseeing the nation’s internet services giants. It is clear signalling from Beijing that regulatory risk for the Big Tech companies would eased significantly as they become favoured by the Chinese government in 2022 to be a key growth driver to revitalise an economy struggling with rolling urban lockdowns, supply chain bottlenecks and evaporating consumption.
In March, Alibaba has authorized an increase of its share repurchase program from $15 billion to $25 billion. Since April 1st to May 25th, Alibaba has repurchased another $3.4 billion in ADS. As of 25th May, Alibaba still has an unused amount of $12 billion under the share repurchase program.
When we covered Alibaba’s results last quarter, we said that the share price may not have seen the bottom yet. Given the current positive Chinese sentiments coupled with its share repurchase program, now there could be a possibility that the stock has finally seen the bottom and may see some further recovery as it exceeded street expectations.
P.S. Many have stated their views on many occasions Alibaba’s bottom and have all looked miserable in the process, we are now putting forth our view that the bottom could be in.
However, with the tepid 4Q22/FY22 performance and uncertain FY23 outlook, the stock is unlikely to recover to its all time high levels for now as this may require a lot more stability, strong economic growth and consumer demand so that the company can achieve stronger growth in FY23.
If you’re interested in China stocks, you might find our guide to Investing in China useful.