Summary
BABA ticker performance in the coming quarters rests on revenue growth rather than EPS or net income.
The company faces industry and company-specific headwinds that will likely suppress revenue this year.
Alibaba reported 10% revenue growth, its slowest rate since going public. Things get worse when adjusting for the 19 extra days of Sun Art consolidation this quarter.
Lintao Zhang/Getty Images Entertainment Investment Thesis
BABA posted topline revenue growth of 10% last quarter, the slowest rate since going public. Even worse, I believe that organically, BABA sales shrank. The company finalized its Sun Art acquisition on October 19th, 2020; thus, Q3 2021 (three months ended December 2021) consolidates 19 additional days of Sun Art revenue compared to the previous quarter. After adjusting for these extra days, it appears that BABA’s revenue decreased by CNY 20 billion on a YoY basis.
The challenging macroeconomic environment shifted to focus on BABA’s ability to grow revenue. Topline figure will remain the primary catalyst for the ticker in the coming quarters. Given BABA’s multiple challenges regarding geopolitical events, namely the loss of the Ukraine market, competitive dynamics, shipping disruptions, and disappointing consumer sentiment in China, I believe BABA is set to post disappointing revenue this year. I’m not sure many know about Queen Viya, the social media influencer responsible for ~3% of BABA’s sales, whose account was shut by CCP for tax evasion.
BABA’s cloud computing business is too small to make a difference, at least for the next few years. This also applied to its logistics services and international segment, including Trendyol and Lazada. China’s consumer segment remains its core business line by revenue and operating income.
When asked about his Alibaba ( BABA ) position two weeks ago, Charlie Munger, a value investor and Buffett’s co-leader of Berkshire Hathaway, cited its characteristics as a value trade, namely value for the dollar invested and competitive moat. However, since his initial investment, the circumstances have changed. BABA’s flagrant monopolistic practices have been well documented, and now that the CCP is cracking down on the sector, its much-touted competitive moat is waning. Second, considering the growth-to-value stock rotation, the “value for the dollar invested” argument is no longer valid. Given the unique political and regulatory risks, I can’t find an advantage in investing in BABA. China Discount
In a 2018 paper published in the Harvard Business Review, Ming Zing, a senior BABA official, casually writes how BABA’s algorithms use “Every transaction, every communication between seller and buyer, every connection with other services available at Alibaba, indeed every action taken on our platform” to determine users’ credit scores.
If you bought BABA at the dip, I assume you have a high tolerance for ESG concerns. There is no judgment here, but investors should heed to the fate of previous investors who lost their capital wrapped up in BABA’s artificial moat built by unfair trade practices. Investors like Charlie Munger, who once touted BABA’s competitive advantage, are watching this edge disappear by a slew of new regulations. If you think the worst is over, think again. CCP is a bureaucratic organization, and change is slow but inevitable as it continues its quest to modernize. The only difference is, unlike the change in the west, which is often preceded by months and years of debate, change in China comes swift and brutal, and CCP’s next target will be data privacy. The casual way Mr. Zing spoke about what is clearly a flagrant abuse of privacy mirrors the fundamental flaws in BABA, warranting a discount on the market. BABA’s models and algorithms are not replicable elsewhere, limiting its scope to the Asian nation.
Many are pointing to BABA’s valuation but rarely is it compared to global tech multinationals, who are trading at similar price multiples and in some cases at lower valuations. Given the Asian nation’s country-specific risk, including regulatory and political risks, I don’t see any edge in BABA over American tech companies, even considering potential growth. Revenue and Earnings
BABA is investing heavily in user acquisition, including discounts, one-time offers for new users, and warehouses in rural areas, all of which are factors suppressing margins. BABA’s equity holdings performed badly in Q3, contributing to net income decline, which shrank 89% on a YoY basis Company Ticker FQ3 Performance Fair Value * (Millions) Bilibili ( BILI ) -28.50% $ 464.00 Weibo ( WB ) -36% $ 278.82 Hello ( MOMO ) -22.20% $ 44.90 1stdibs ( DIBS ) 0.40% $ 18.32 Alibaba Equity Holdings. *Fair value as of December 2021 (SEC […]
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