Is the worst over for Alibaba?

TL;DR

• Alibaba’s share price has bounced by more than 50% from its lows, supported by easing regulatory concerns and an upsized share buyback programme.
• China’s recent willingness to allow the US full access to the audits of Chinese companies listed in New York has led to further optimism on the improving regulatory landscape.
• However, Alibaba continues to face slowing revenue growth amidst growing saturation in the Chinese e-commerce market and rising competition from Douyin, China’s TikTok.
• Alibaba is trading as a “value stock” with a price-to-earnings ratio of 13x. It will need to demonstrate an ability to grow its revenue more rapidly for investors to be excited about the stock again!

What happened?

Which stock saw its revenue growth slowing in the last quarter, faces rising competition and trades at 13x P/E?

You would think that this is probably a company in a sunset industry. Maybe a traditional industrial company or automaker. Or even a property developer.

But this is actually Alibaba, the world’s largest online mobile e-commerce company by gross merchandise value (GMV).  

It is no wonder that the stock has fallen by close to 50% in the past year. The stock went as low as US$73 during a massive selldown of Chinese tech stocks in the middle of March, before recovering to about US$109 as of 31 March.

With the sharp bounce off its lows, is the worst for Alibaba truly over?

Regulatory environment improving

When it comes to Chinese tech stocks, the regulatory risk is at the back of every investor’s mind. After all, it wasn’t too long ago that Alibaba’s Ant Financial IPO was pulled a few days before it was set to list.

On this issue, investors have cheered the recent pledge by Vice Premier Liu He to stabilize capital markets and end crackdowns on private enterprises. Following the bounce in Chinese shares, the market is now awaiting to see how this talk is going to be translated to action.

For now, it seems like the market is not entirely convinced as news of further regulatory clampdown continues to trickle in. For example, there are media reports that the Chinese government is preparing new regulations on the live-streaming industry including a daily cap on tipping. However, these measures could be seen as a narrow set of measures that are targeted at a specific sector, rather than a reversal of support. 

More importantly, Bloomberg has reported that China is removing a major hurdle to allow the US full access to audits of most Chinese companies listed in the US. As recently as last week, Chinese companies such as iQiyi, Futu and Baidu were added to a list of companies liable under the audit oversight law, leading to a sharp fall in their share prices. The move to allow access to audits could help to lower the risks of these companies being forced to delist if they are not able to comply with audit inspection rules.

Alibaba needs to accelerate on its revenue growth

Alibaba’s customer management revenue (CMR) fell by 1% YoY in 4Q21, disappointing investors who were still expecting the company to be able to show some growth. In the previous quarter, it was able to grow CMR by 3% YoY.

The customer management revenue measures the money derived from charging merchants for services on its Taobao and Tmall e-commerce platforms. It is closely watched as it represents the single largest portion of Alibaba’s sales.

This may not be a surprise given that the growth of e-commerce in China is slowing down. The percentage of China’s retail sales that was done online rose sharply from 15.0% in 2018 to 24.9% in 2020, as the pandemic accelerated the e-commerce boom. However, the proportion of online retail sales fell to just 24.5% in 2021, mirroring a re-opening reversal in many other countries.

The outlook for online shopping remains weak. According to data from government agencies, online retail sales only grew by 1.4% YoY in January. Definitely not the high growth industry that many in the e-commerce market might be used to.

Apart from slowing industry growth, Alibaba is facing a large and formidable competitor in the form of Douyin, China’s TikTok.

Are you now scratching you head and wondering how can TikTok become a threat to Alibaba in the e-commerce business? That’s because live streaming e-commerce is a big thing in China.

Douyin has been expanding in e-commerce by recommending stores and live-streaming influencers to consumers by using its algorithms.

Its e-commerce GMV was reported to have grown to above RMB 800 billion in 2021, and it has set itself a lofty target of exceeding RMB 1 trillion in GMV this year. That’s a rate of growth that is far exceeding what the e-commerce market in China is growing at!

What would Beansprout do?

• Improving regulatory landscape a positive. The Chinese government’s pledge to end crackdowns on Chinese private enterprises, and willingness to allow the US full access to audits of Chinese companies have helped to reduce regulatory risks for Chinese tech stocks.
• Alibaba’s revenue growth will need to accelerate. However, Alibaba needs to find new growth drivers to offset the slowdown in its Chinese e-commerce business where it faces increasing competition. Here, Lazada might be its best bet given its strong presence in Southeast Asia. In 4Q21, its GMV managed to grow by more than 50% YoY!
• Valuation. Alibaba is currently trading at 13x 2022 P/E. That doesn’t sound too far fetched for a company whose earnings are expected to grow at about 10% in 2023. Alibaba has also announced an increase its share buyback programme to US$25 billion from US$15 billion. This could help to support its share price as it represents close to 8% of its current market capitalization.

Wondering why Charlie Munger might be interested in Alibaba’s shares? Check out our article Why Munger might be wrong on Alibaba.