Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alibaba was previously regarded as a promising investment opportunity tied to China's extensive growth prospects. It boasted ownership of Taobao and Tmall, the nation's leading e-commerce platforms, as well as Alibaba Cloud, the largest public cloud infrastructure platform in the country. Additionally, it had a diverse portfolio of retail, digital media, and gaming ventures.
However, Alibaba has experienced a significant setback in the past five years, with its stock plummeting by nearly 60% and displaying weaker performance compared to many other Chinese technology stocks. Now, let's delve into the reasons behind Alibaba's decline in appeal and explore the likelihood of a stock rebound in the upcoming several years.
Despite Alibaba's declining stock price, its business has continued to expand over the past five years. From fiscal 2018 to 2023 (ending in March), the company achieved an impressive compound annual growth rate (CAGR) of 28% in annual revenue, with adjusted net income increasing at a CAGR of 11%. However, recent data reveals a concerning deceleration in growth over the past two years, as depicted in the following table.
This slowdown can be attributed to two primary challenges. Firstly, Alibaba faced significant setbacks when China's antitrust regulators imposed a historic fine of $2.8 billion in 2021. As a result, the e-commerce division was compelled to terminate exclusive deals with merchants and reduce loss-leading promotions. These tighter restrictions weakened Alibaba's competitive position against rivals like JD.com and Pinduoduo in China's fiercely competitive online retail market.
Secondly, China endured a substantial economic slowdown during the pandemic, further exacerbated by intermittent "zero COVID" lockdowns throughout 2022. These macroeconomic headwinds had a broad impact on consumer spending across Alibaba's e-commerce platforms and also hindered enterprise spending on its cloud infrastructure services.
To address the regulatory, macroeconomic, and competitive challenges it faced, Alibaba made significant strategic moves to streamline its operations. In March, the company restructured its sprawling business into six distinct groups: Cloud Intelligence, Taobao Tmall Commerce, Local Services, Cainiao Smart Logistics, Global Digital Commerce, and the Digital Media and Entertainment Group. Each of these groups will have its own CEO and will have the opportunity to seek external funding or conduct initial public offerings (IPOs) to raise capital.
During the fourth-quarter conference call in May, Alibaba announced plans to spin off its Cloud Intelligence group through an IPO within the next 12 months. Existing Alibaba investors will receive shares of the new company through a stock dividend distribution. The company has also been exploring potential IPOs for its Cainiao logistics division and Global Digital Commerce group, which includes AliExpress, Lazada (a Southeast Asian marketplace), and Trendyol (a Turkish marketplace).
While Alibaba will retain controlling equity stakes in these spin-off companies, the IPOs can generate fresh capital and remove their expenses from Alibaba's financial statements. Additionally, the newly independent companies will have the freedom to increase their spending without impacting Alibaba's other businesses.
Consequently, Alibaba's overall margins could improve as it separates its lower-margin divisions such as cloud services, logistics, and cross-border commerce. These spin-off companies can then expand more rapidly without being closely managed by Alibaba. If these new companies thrive, Alibaba's investment portfolio could grow, leading to increased net profits. Furthermore, the spin-offs may help alleviate concerns from antitrust regulators by reducing the synergies between Alibaba's e-commerce, cloud, and media operations.
Over the next several years, the spin-offs initiated by Alibaba have the potential to attract significant investor attention. Concurrently, the reported growth of Alibaba itself is expected to stabilize as the macroeconomic environment improves and its core markets expand. Projections indicate that China's e-commerce market could grow at a compound annual growth rate (CAGR) of 12% from 2023 to 2027, while the country's cloud computing services market is anticipated to expand at a CAGR of 21% from 2022 to 2030, according to eCommerceDB and Reportlinker respectively.
Analysts forecast that Alibaba's revenue will grow at a CAGR of 9% and its net income will increase at a CAGR of 30% from fiscal 2023 to 2025, as the company continues to spin off subsidiaries and exercise spending discipline.
If Alibaba meets these analysts' expectations and maintains a relatively modest CAGR of 10% in revenue and net income from fiscal 2025 to fiscal 2028, it could potentially achieve approximately 1.37 trillion yuan ($190 billion) in revenue and 165 billion yuan ($23 billion) in net income by the final year. This would represent a 58% increase in revenue and a 128% increase in net income compared to fiscal 2023.
Considering these factors, even if Alibaba's valuations remain at their current levels, its stock could potentially double within the next several years. However, the advent of a new bull market and the resolution of delisting concerns surrounding US-listed Chinese stocks could elevate its valuations to even greater heights. In simple terms, it would not be surprising if Alibaba's stock triples or exceeds that growth by fiscal 2028.
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As long as the price is above 79.00, follow the recommendations below::
- Time frame: D1
- Recommendation: long position
- Entry point: 87.39
- Take Profit 1: 93.00
- Take Profit 2: 103.00
Alternative scenario:
If the level of 79.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 79.00
- Take Profit 1: 75.00
- Take Profit 2: 70.00
