Alibaba: A Cautionary Evaluation

Robert Way has been analyzing Alibaba Group Holding Limited (NYSE:BABA), (OTCPK:BABAF) since September 2021 and has consistently offered a cautious take on its stock. Despite an initial 'Sell' rating, Way later adjusted his stance to 'Hold' in December 2021. Yet, Alibaba's stock continued to decline in value.

A Closer Look at Alibaba's Financial Results

When Alibaba reported its financial results for Q2 of the fiscal year 2024 on November 16, 2023, it triggered a downturn not only for its own stock but also impacted the broader Chinese tech sector. Share prices dropped by 9% following the announcement. The company reported a revenue increase of 8.5% year-over-year, reaching RMB224.79 billion ($30.81 billion). However, this was short of analysts' expectations. On the upside, non-GAAP earnings per ADS rose by 21%.

Breaking it down by segment, Taobao and Tmall's revenue was up by 4%, the International Digital Commerce Group saw a significant 53% increase, Cainiao's revenue grew by 25%, and Local Services Group experienced a 16% rise. Even the Cloud Intelligence Group, although growing only by 2%, had a notable 44% increase in adjusted EBITDA. Moreover, the company has been aggressively repurchasing shares and has announced a dividend plan to reward long-term investors.

The Market's Reaction and Future Prospects

Investors were initially hopeful about Alibaba's potential restructuring into six separate entities, which was expected to significantly enhance shareholder value. Nevertheless, plans to spin off the Cloud Intelligence Group were dashed partially due to US export restrictions on advanced computer chips. This undoubtedly surprised the market and contributed to the subsequent stock price fall.

Alibaba has since shifted its focus to investing in core businesses like Taobao and Tmall to drive sustainable growth and improve return on invested capital. Challenges in the cloud segment, macroeconomic conditions in China, and geopolitical risks, however, continue to cloud Alibaba's prospects. With the business experiencing negligible growth, its appeal as a value investment becomes questionable.

The Verdict on Alibaba

Comparison with other companies like eBay and MercadoLibre reveals that despite Alibaba's low valuation, investors might find better growth and value elsewhere. The company's solid financial position notwithstanding, the potential stock price recovery could simply provide an exit opportunity for remaining investors, rather than a long-term growth proposition.

Given the context, buying into Alibaba's stock might not be the wisest choice for investors, as the underlying issues signal a static or bearish outlook.

Alibaba, Analysis, Investment