Alibaba FQ1 2022 – Bottom bumble

Recovery is completely tied to the economy.

• A depressing set of results met with relief by the market is a sign that all of the downside is priced into the stock paving the way for a steady, but probably slow recovery that is going to take some time.
• FQ1 2023 revenues / EPS were RMB205.6bn / RMB1.06 just ahead of forecasts of RMB204bn / RMB1.04.
• Chinese e-commerce declined by 1% YoY as a result of higher competition and China’s strangling of its own economy with Covid Zero.
• These caused continued slowness in April and May but the company has seen signs of recovery in June which goes hand in hand with a slight slackening of the health restrictions.
• This is an indication of just how much Alibaba’s fortunes are now tied to the Chinese economy and it is here where the recovery is likely to be based.
• Surprisingly, Cloud has also been slower, unlike the others which boomed during the pandemic and have continued to be very strong as inflation has forced companies to look at cutting costs.
• Growth in Alibaba Cloud has slowed to 10% YoY, a large part of which is due to declining demand from the technology sector much of which has been hammered by regulation.
• Growth from the other areas of the economy has been much better for Cloud and as the economy comes back to life, I expect this too will pick up its pace of expansion.
• As a result of the slower growth, management is working on focusing the company back on its core businesses which will also help its relationship with the regulator.
• This will help improve margins, but the real recovery is completely dependent on the re-emergence of China from its Covid-induced hibernation.
• The recent worries about being delisted from the USA also do not concern me greatly.
• This is because everyone who is nervous about China has already sold their position and Alibaba has no need for foreign capital or any capital at all as it is perfectly capable of sustaining itself through cash flow.
• The only concern is that Hong Kong is a much smaller market than the USA and while Shenzhen and Shanghai offer much greater liquidity, they are not open to international investors.
• Hence, if the primary listing becomes Hong Kong only, it will become more difficult for large investors to hold a position.
• That being said, this has not really been a problem for Tencent whose only international listing of note is Hong Kong.
• Alibaba is still dealing with a wall of negative sentiment that keeps a lid on any rally the shares attempt, but these results indicate that this is pretty much priced in.
• Hence, I think that Alibaba will bounce around down here until a proper recovery in the Chinese economy takes hold and then it will begin to recover.
• I suspect that the recovery will be slow with one bit of good news building on another to create a multiyear rally back to much higher profits and a higher multiple.
• What began as a 1-2 year holding on a valuation discrepancy has become a 3-5 year holding but given that the upside is so significant, this remains a worthy position despite the pain it has inflicted.