Alibaba FQ3 2022 – Nadir of fortunes

Priced for stagnation

• Alibaba reported reasonable results but heavy investments, competition and China’s restrictive zero COVID policy are hurting both growth and profitability in the short term.
• I think that China is going to be forced to abandon zero COVID reasonably soon which, combined with stepping up to meet the competitive threat, should mean that growth will come back over the medium term.
• FQ3 2022 revenues / Adj-EPS were RMB242.6bn (up 10% YoY) / RMB2.11 compared to forecasts of RMB245.7bn / RMB2.04.
• Reported profitability was much lower as the company wrote down RMB3.9bn in goodwill related to its digital media and entertainment segment.
• Excluding this write down, operating profit still fell by 34% YoY as the company has ramped up its investments in new business areas in order to recapture some of the high growth it has historically enjoyed, which is partly being usurped by competitors.
• Competition is taking for the form of community buying which is where buyers and sellers are geographically very close to one another and services that offer deals online.
• Taobao Deals and Taocaicai are two products Alibaba has launched to meet such competition, but while they are seeing good initial traction, they remain unprofitable.
• The size of Alibaba’s ecosystem continues to grow, albeit slowly, with 43m new MaUs added over the last three months bringing the total to 1.28bn of which 979m are in mainland China.
• The outlook for the next fiscal year 4/22 to 3/23 is going to be difficult when Alibaba delivers its annual results in May as I think most of the headwinds will still be in place at that time.
• Over the last 6 months, Alibaba has been treading on eggshells in terms of competition, but I think that now it has a better feel for the new regulatory landscape, it will be able to compete more aggressively from now on.
• This combined with the inevitable end of China’s obsession with zero COVID and its newer products are very likely to underpin a return to higher revenue growth.
• I don’t think that we will see 40% again but a steady 20% to 30% as growth returns is perfectly possible as Amazon has ably demonstrated.
• Critically Alibaba is now priced as a company that has become a low growth with a 12-month forward PER of 14.5x and an EV / Sales of around 2x.
• Hence, the decision whether to abandon Alibaba depends on whether one believes that things get worse from here.
• I think that the regulatory overhang has long since passed over Alibaba with the regulation being a much bigger problem for Tencent.
• This, combined with a pretty good outlook for a resumption of growth towards the end of the next fiscal year and the year after makes Alibaba worth waiting for.
• While one waits, I think it bumbles along the bottom at around these levels as there is no visible catalyst that would lead the market to reassess the value proposition of this company.
• Hence, I am sticking with my battered Alibaba position in the probability that the worst is over and that there are better times ahead.