Alibaba | Fundamental Analysis

The previous several years have been petty tough for e-commerce giant Alibaba Group, to say the least. After peaking amid the coronavirus pandemic, the company lost nearly 80% of its value over the next two years. Since then, the company has rallied, up 78% from its October 2022 low, but still a far cry from the levels that preceded the COVID-19 pandemic.

Needless to say, these have been challenging times for Alibaba and its investors. And while the company still has a considerable way to go and overcome challenges, here are a few reasons to be optimistic about Alibaba stock.

China begins to roll back quarantine restrictions
China's anti-COVID-19 policies have undoubtedly hurt Alibaba. The ban has negatively impacted China's overall economic activity, and taking into account Alibaba's size and how entrenched it is in the Chinese economy (which is the second largest in the world), it has had a direct impact on the company.

In addition to people spending less during store closures in China, this policy has also hurt Alibaba's logistics network, particularly due to road and highway closures. All of this led to the company's first-ever low YoY revenue growth in June 2022.

But there should be brighter days ahead. No one can say for sure when China will fully open its doors, but some parts of the country have begun to take steps in that direction in December last year. If the situation is similar to the U.S., a reopening in China could boost economic growth with the help of improved spending and household consumption. Alibaba should benefit from this.

Cloud business growth
Cloud infrastructure and services are becoming an important part of any business that uses the Internet for its operations. In Q3 of 2022 alone, global spending on cloud infrastructure services rose to $57 billion, bringing total spending in the past 12 months to $217 billion.

With a 5% market share, Alibaba Cloud lags behind market leaders Amazon Web Services, Microsoft Azure, and Alphabet Google Cloud (34%, 21%, and 11%, respectively), but the trend is there.

For the quarter that ended Sept. 30, 2022, Alibaba Cloud revenue grew 4% YoY to more than $2.9 billion, driven by public cloud growth. More encouraging, however, should be the growth in Alibaba Cloud's non-Internet Industry (NII) customers. The number of NII customers grew 20 percent year over year to 58 percent of total cloud revenue.

These strong results were achieved at the expense of government services, telecommunications companies, and financial services. Cloud services are integral to all three of these areas, which could lead to long-term recurring revenue for Alibaba.

The global cloud computing market is projected to reach more than $1.7 trillion by 2029, at an average annual growth rate of just under 20 percent. Even if Alibaba Cloud can't make the top three in market share, it will have plenty of room for success as it expands the overall pie.

Jack Ma's departure from Ant Group
No one was surprised when Jack Ma, Alibaba's founder, announced he was stepping down as chairman. Although Ma had led Alibaba's development and triumph, his departure did not affect the company too much because the leadership was already in new hands.

However, many were shocked when Ma announced that he was giving up control of fintech giant Ant Group, in which Alibaba has a 33% stake. Ant Group was scheduled to go public in November 2020 with a capitalization of about $37 billion, but the stock was canceled at the last minute largely because of regulatory scrutiny.

With Ma no longer controlling Ant Group, the likelihood that the company could restart its initial public offering (IPO) process has increased significantly, though it likely won't be smooth. Ant Group's IPO could bring Alibaba a large cash infusion that could be used as China's quarantine restrictions ease.

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