Alibaba's Earnings Report and Future Prospects:Detailed Analysis

Following the release of Alibaba's latest earnings report on May 18th, the company's stock encountered a 5% decline. In the fourth quarter of fiscal 2023, which concluded on March 31st, the Chinese e-commerce and cloud leader achieved a 2% year-over-year increase in revenue, reaching 208.2 billion yuan ($30.3 billion). This figure surpassed analysts' expectations by $410 million. Furthermore, Alibaba's adjusted net income experienced a significant rise of 38%, amounting to 27.4 billion yuan ($4.0 billion), or $1.56 per American depositary share (ADS). Additionally, the company surpassed the consensus forecast by $0.21 in terms of adjusted earnings.

For the full fiscal year, Alibaba achieved a 2% growth in revenue and a 4% increase in adjusted earnings per ADS. Despite these positive results, Alibaba's stock price has plummeted more than 70% from its all-time high in October 2020. This situation prompts investors to consider whether Alibaba's stock presents a value play opportunity in the context of China's COVID-19 recovery or if it will remain out of favor in the Chinese tech sector for the foreseeable future.

Alibaba's decline can be attributed to a combination of regulatory, competitive, and macroeconomic factors. In September 2021, the company faced significant regulatory actions when China's antitrust regulators imposed a record-breaking $2.8 billion fine on Alibaba. This penalty required the company to terminate exclusive agreements with merchants and aggressive promotional practices while undergoing scrutiny of past and future investments. These regulatory measures weakened Alibaba's competitive position against rivals such as JD.com and Pinduoduo in the Chinese e-commerce market.

Furthermore, macroeconomic challenges impacted Alibaba's performance. China's economic slowdown and intermittent COVID-related lockdowns had a broad impact on consumer spending, consequently affecting Alibaba's performance. Companies also reduced their spending on Alibaba's cloud services due to the challenging economic conditions. Additionally, Alibaba's cloud business suffered a setback when ByteDance, under international pressure, transitioned the data of TikTok's overseas users from Alibaba Cloud to Oracle's cloud servers in 2021.

In terms of revenue distribution, Alibaba generated 67% of its revenue from its China Commerce segment, which encompasses platforms like Tmall, Taobao, and brick-and-mortar stores. Another 9% of revenue came from Alibaba Cloud, which remains the leading cloud platform in China. It is worth examining the performance of these two core businesses over the past two years.

Although the economic slowdown significantly impacted investor sentiment towards Alibaba, there are positive developments worth noting. Alibaba's operating margin expanded from 8% in fiscal 2022 to 12% in fiscal 2023, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin increased from 19% to 20%. These improvements can be attributed to aggressive cost-cutting measures, including a significant reduction in the workforce with approximately 19,000 layoffs throughout 2022.

In March, Alibaba unveiled its future plans, which involve dividing its business into six new groups: Cloud Intelligence, Taobao Tmall Commerce, Local Services, Cainiao Smart Logistics, Global Digital Commerce, and the Digital Media and Entertainment Group. Each group will be led by separate CEOs, and many of them will pursue additional funding or initial public offerings (IPOs).

As an update to these plans, Alibaba announced in its fourth-quarter report that it intends to conduct an initial public offering (IPO) for its entire cloud division. The company plans to distribute the shares from this IPO as a special dividend to its current shareholders. Additionally, Alibaba aims to seek external financing for its global e-commerce division, which includes its overseas and cross-border marketplaces. Furthermore, the company is exploring potential IPOs for Cainiao Smart Logistics and the grocery division of its Taobao Tmall Commerce Group.

It's important to note that Alibaba's restructuring plan does not involve a complete split of the company. Even if the various business groups are spun off into publicly traded companies, Alibaba will retain majority stakes in all of them. The purpose of the restructuring is to enable these groups to pursue external financing independently, thereby reducing the burden on Alibaba's balance sheet. Additionally, it allows each group to make autonomous decisions without concerns about potential impacts on Alibaba's other divisions.

While Alibaba did not provide specific guidance for fiscal 2024, there is potential for its growth to accelerate as China's economy undergoes a post-COVID recovery. The spinoff of Alibaba Cloud has the potential to generate fresh capital and enhance the company's profitability.

Analysts anticipate that Alibaba's revenue and adjusted EBITDA will grow by approximately 10% and 9% respectively in fiscal 2024. However, these estimates should be approached with caution due to existing uncertainties. From a valuation standpoint, Alibaba's stock appears inexpensive, trading at around two times this year's sales and 10 times its adjusted EBITDA. Nevertheless, the stock may continue to face challenges until its revenue growth gains momentum and concerns regarding delisting threats for U.S.-listed Chinese stocks are addressed.

While Alibaba is certainly worth monitoring, it may not be considered an outright bargain at the current moment. Investors should exercise caution and closely monitor the company's growth trajectory and the regulatory environment before making investment decisions.