Alibaba FQ3 25 – Unhappy Hostage.

Alibaba remains captive to China’s poor economy.

• The performance and outlook at Alibaba are a strong indication that in reality, the Chinese economy remains moribund and that a lot more stimulus and a relaxation of state oversight is required for China to begin really growing once again.
• FQ3 25 revenues / EPS were RMB236.6bn (up 5% YoY) / RMB2.27 broadly in line with estimates but there was little encouragement when it came to the commentary and outlook.
• Here, the core Chinese e-commerce websites are barely treading water while the Cloud Intelligence Group managed just 7% YoY despite being all about providing AI to its customers.
• It is clear that the AI boom that is driving Azure, AWS and Google Cloud is completely passing China by as revenues are barely expanding and Alibaba is investing minimally in its infrastructure.
• For example, AWS, Azure and Google are all expected to spend $40bn+ on capex each in 2024 while Alibaba, the leading cloud player in the world’s 2^nd largest economy has a run rate of $8bn.
• This puts Alibaba in a good position when the correction happens and everyone realises that the Western cloud companies have vastly overspent, but at the moment it’s a signal that AI is passing China by.
• Part of the reason for this is the restrictions that make it very difficult or impossible to purchase leading-edge chips, but I think most of it is due to the economic malaise and the moribund state of the technology sector in general following the depredations of the Chinese state.
• For example, many VCs in China have turned into debt collection agencies as they chase start-ups to repurchase shares that they sold having failed to have executed an IPO or trade sale within the specified time frame.
• Furthermore, the willingness to commit capital to new ventures and foreign investment remain at rock-bottom levels (see here).
• The burst of enthusiasm following the stimuli announced on 24^th September has largely petered away with most of the technology sector losing almost all of the gains registered from the state action.
• The real problem is that the Chinese state has demonstrated that all business in China operates only with its permission which can be withdrawn, curtailed or cancelled at any time and with no warning.
• From an investment perspective, this adds a level of risk that is both potentially very large and unquantifiable, which has meant that foreign and domestic investors remain very bearish regarding investing in China.
• Against this backdrop, Alibaba is going to grow very slowly, make a reasonable return and continue to buy back shares and pay dividends.
• The one bright spot is its international business which grew by 35% YoY but at just 11% of revenues, it is going to take a long time before this moves the needle in terms of top-line growth.
• The good news is that this depressing outlook is fully priced into the 10.6x 2025 PER multiple meaning that there is very little downside that has not been priced in.
• However, with a catalyst for recovery being dependent on China deciding that the best way to develop its technology sector is to let the private sector run free, there is no knowing when this is going to happen.
• I still own Alibaba as there is a dividend and the shares are becoming more valuable as the company buys back and cancels shares meaning that I am getting paid while I wait.
• However, It could be a long and dreary wait.