Macro and competition temper outlook
- Alibaba reported disappointing results and cut full-year guidance as China’s restrictive Zero COVID strategy is slowing demand and its competitors are nipping at its heels.
- This all comes at a time when Alibaba is also investing heavily for the future which while it is well-timed in terms of increasing competition means that in the short-term profitability will be lower.
- FQ2 2022 revenue / EPS were RMB200.7bn / RMB1.97 behind forecasts of RMB206.2bn / RMB8.16.
- Apart from the investments and competition, net income and EPS were hit by revaluations of its investment portfolio mainly driven by the impact that the regulatory clampdown has had on the Chinese technology sector.
- On top of this, Alibaba has been forced to downgrade its expectations of FY growth to 20% – 23% YoY.
- None of this was particularly well received and the shares fell by 11% after the publication of these results.
- Overall, almost all of Alibaba’s woes are being inflicted upon it by the state as the highly restrictive and isolationist zero COVID policy is causing the economy to return to life much more slowly than I would have expected.
- China is going to have to open its doors at some point and it is then that I would expect to see a “catch-up” bounce as the country goes properly back to work.
- There is no clear indication of when this will occur but the rest of the world is demonstrating that COVID is now endemic and unless China wants to be a hermit kingdom like North Korea, then it too will have to live with the disease.
- Until then, there are no real catalysts for Alibaba because its size means that growing market share is not really a viable option to offset the weak macro.
- Furthermore, while the investments that Alibaba is making come at a bad time financially, they are perfectly timed in terms of holding market share in a more competitive market.
- Alibaba is the gorilla in this space and as such, it is in a better position to offer merchants better economics as it can spread the investments over a wider revenue base than anyone else.
- This combined with the fact that the regulatory shadow has long since passed Alibaba by means that the shares remain extremely cheap.
- I have made some cuts to what I was expecting for this fiscal year and next but still, find the shares to be trading at depressed levels.
- The shares are trading at 11.3x March 2023 PER and 8.1x March 2024 compared to Amazon which is on 53.0x December 2022 PER and 37.6x December 2023 PER.
- Even with the short to medium-term estimate cuts, both companies are exhibiting similar levels of growth in EPS over the next three years.
- The company has executed $5bn of its $15bn share buyback program and with this decline, I expect to be more active in executing the remaining $10bn.
- This should provide some support around these levels.
- Hence, I do not think that this weak set of results has materially changed the thesis on Alibaba and so I am happy (albeit somewhat beaten up) to carry on waiting for this one to turn around.
