What’s Happening With Alibaba Stock?

Chinese e-commerce and cloud behemoth Alibaba stock (NYSE:BABA) has been a weak performer this year, rising by just about 1% since early January. In comparison, its U.S.-based peer Amazon (NASDAQ:AMZN)  has gained a solid 27% over the same period. The company has been weighed down by multiple factors, including a slowing Chinese economy and mounting competition from new e-commerce players. That said, we think that the stock looks attractive, given its reasonable valuation and potential for growth in areas such as artificial intelligence.

China’s economic growth has been weak with GDP rising by just about 4.7% in the second calendar quarter of 2024, down from 5.3% in the first quarter, as the country faces a downturn in the real estate market and a slow rebound from stringent Covid-19 lockdowns that ended over a year ago. Moreover, consumer spending and domestic consumption also remain weak in China. Retail sales recently fell to an 18-month low due to deflation, as businesses have been cutting prices while employers have been reducing salaries with unemployment among the youth remaining high at about 14% in May. Moreover, Alibaba is seeing mounting competition in the e-commerce space with PDD, the owner of discount e-commerce platforms Pinduoduo and Temu, gaining share as Chinese consumers become more value-conscious due to a weak economy. Over Q4 FY’24, revenue from the company’s Taobao and Tmall online marketplaces rose by just about 4% year on year to 93.2 billion yuan ($12.9 billion). Alibaba’s cloud computing business has also seen growth cool off considerably, with revenue rising by just about 3% over the most recent quarter. The slowdown comes as demand for computing power relating to remote work, remote education, as well as video streaming eases following the Covid-19 lockdowns. The U.S. restrictions on the export of advanced semiconductor chips could also be having some impact on the business.

BABA stock has suffered a sharp decline of 65% from levels of $235 in early January 2021 to around $80 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. Notably, BABA stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -49% in 2021, -26% in 2022, and -12% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that BABA underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BABA face a similar situation as it did in 2021, 2022,  and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

The regulatory troubles that Alibaba faced through 2021 and 2022 relating to its affiliate and digital payment services major Ant Group appear to be in the rearview mirror. Alibaba is also tweaking its e-commerce strategy to be more like value-focused players such as Pinduoduo. Alibaba’s valuation is also compelling. At the current market price of about $78 per share, BABA stock trades at under 9.5x forward earnings, which is very fair in our view, given that the company is likely to see high single-digit growth levels over the next two fiscal years.  Alibaba has also been doubling down on its share repurchases, spending about $5.8 billion to buy back 77 million American depositary shares during the quarter ended in June 2024.  Alibaba’s overall valuation is much more favorable compared to U.S. e-commerce behemoth Amazon, which trades at roughly 42x forward earnings, with only marginally higher near-term revenue growth projections. Although the risks for Chinese stocks are typically higher given the potential regulatory and political concerns, we still believe that such a large difference in valuation may not be warranted. Moreover,  Alibaba is witnessing higher demand for its artificial intelligence-related products within the cloud division. The company said that AI-related revenue saw triple-digit growth during the most recent quarter and it’s likely that the AI will provide some upside for overall growth. We estimate Alibaba’s valuation at about $107 per share indicating a 37% upside from the market price of about $78 per share.  See our analysis of Alibaba revenues for more details on how Alibaba’s revenues are likely to trend.

[1] Returns as of 7/16/2024
[2] Cumulative total returns since the end of 2016

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