Alibaba – Nadir of fortunes.

Alibaba plumbs the depths.

• Alibaba has lost its crown as the biggest e-commerce company in China to PinDuoDuo, which combined with a botched restructuring and lacklustre results leads one to think that Jack Ma needs to be much more involved rather than operating from the shadows.
• PinDuoDuo reported stellar results this week with revenues almost doubling which sent the US-listed shares up 18% which combined with Alibaba’s weakness has allowed it to eclipse Alibaba as the most valuable e-commerce company in China.
• PinDuoDuo’s edge is its focus on bargains which in the lacklustre economic climate in China has struck a chord with Chinese consumers.
• Alibaba, on the other hand, covers all areas of e-commerce and so is much more broadly exposed to the Chinese economy.
• However, this alone cannot explain the difference in revenue growth where PinDuoDuo grew by 94% YoY and Alibaba 9% YoY leading me to think that there are other factors at play.
• I suspect that one of these is extremely poor employee morale at Alibaba which is what catalysed Jack Ma to step in with a post on an internal forum which quickly “leaked” to the press.
• Mr Ma was responding to a post regarding PinDuoDuo’s excellent results and he states that he believes that Alibaba will change and reform and that Alibaba employees are always listening.
• Change and reform are badly needed as the botched restructuring and relatively weak results have only served to deepen the gloom.
• The new CEO, Eddie Wu, who took over from Daniel Zhang in March, reversed the spin out of AliCloud believing that it should remain in-house so that AI can contribute to Alibaba’s recovery as well as citing poor market conditions.
• This does not make complete sense as the market for generative AI companies remains white hot and PinDuoDuo is demonstrating that it is possible to entice investors to look beyond the risks of investing in China.
• Hence, if AliCloud was really growing as a result of AI or had prospects to do so in the near future, Alibaba would not have much trouble in spinning it off.
• I suspect that the real problem is that growth at AliCloud remains weak due to the Chinese economy meaning that it will struggle to achieve a good valuation if it was spun-off.
• I think that this means that the spin-off will be back on the cards when things are better but in order to achieve that, things have to change.
• This is what Jack Ma is referring to and I think that he has far more influence over the running of the company than the public statements would lead us to believe.
• Eddie Wu is one of the original founders of Alibaba and is known as a close associate of Jack Ma’s and as such, I hope that Mr Ma will be deeply involved in the strategy and execution to affect a turnaround.
• This now badly needs to happen as the rot is now deep inside Alibaba with both the state and now competitors having taken their pound of flesh.
• Jack and Eddie need to come up with a new strategy to turn the ship around and critically, regain the trust of employees and shareholders.
• Should this happen then Alibaba is in a position to benefit when the Chinese economy recovers and having Jack Ma could add some juice to the scale of the recovery when it comes.
• However, there is no way to tell when this is going to happen, and China is probably one the most hated trades with international investors at the moment despite the pretty valid argument that China is lower risk now than it was 5 years ago.
• Alibaba’s multiples remain a small fraction of Amazon’s meaning that even a small mean reversion could trigger a substantial rally in the shares.
• I have a position and the time to wait but it is long and dreary.