Alibaba is cheap enough, but it's not the good time to buy

After Alibaba's financial report was released, its stock price also dropped by 9%. However, this big drop is not only due to performance, but also related to the company's spin-off plan.

Alibaba's two key business pillars, domestic e-commerce and cloud computing, both performed poorly this quarter. The decline inTaobao and Tmall Group's GMV raised concerns about a potential loss of market share in the fiercely competitive e-commerce industry. The customer management revenue (CMR) was CNY 68.7 billion, with a year-on-year growth rate of 3%, but its growth rate slowed down compared to previous quarters. In a highly competitive market environment, Taobao and Tmall experienced a slight year-on-year decline in GMV this quarter, which was lower than market expectations. However, the monetization rate has improved and effectively boosted merchants' willingness to advertise, thus keeping CMR growing positively.

Alibaba International Digital Commerce Group revenue grew by 53% year-on-year, significantly exceeding market expectations of 36%. AliExpress benefited from the strong growth of AE Choice, which resulted in improved user retention rates and purchase frequency. Lazada seized the opportunity of the change in Indonesia's e-commerce policy to attract TikTok sellers. However, it should be noted that Pinduoduo's TEMU has also joined the competition, and there is uncertainty about the future competition pattern in Southeast Asia.

In the third quarter, Alibaba's Cloud Intelligence Group had a revenue of CNY 27.6 billion, with a year-on-year growth rate of only 2%. However, the growth was mainly due to the adjustment in Alibaba's new accounting method for consolidated businesses. If the adjusted business is not taken into consideration, the revenue actually slightly decreased year-on-year. The cloud computing business strategy has reduced low-margin project-based services and focused on public cloud growth, which has had some impact on revenue. In an environment where enterprise spending remains low, although there are price cuts and AI technology innovations, the lack of government and internet clients makes it difficult to find new sources of revenue growth in the short term. While the cancellation of project-based orders will have some impact on revenue in the short term, the profit margin is expected to improve.

Due to recent expansions of export restrictions on advanced computing chips by the US, there is uncertainty regarding the prospects of Alibaba's f Cloud Intelligence Group. As a result, the decision has been made to suspend plans for a complete spin-off of the Cloud Intelligence Group. Additionally, the initial public offering plan for Hema is currently put on hold. According to filings with the US Securities and Exchange Commission, JC Properties Limited and JSP Investment Limited, both fully owned by the Ma Yun family trust, plan to sell founder shares worth a total of $870 million on November 21. In addition to the existing share buyback plan (which still has a quota of $14.6 billion and is valid until March 2025), Alibaba has announced the first annual dividend for the 2023 fiscal year, with a total payment of about $2.5 billion.

The initial spin-off plan was expected to boost the overall valuation of the company, but this expectation has now been shattered. Although the scale of the founder's share reduction is not large, it sends negative signals and market confidence is relatively low.

Alibaba's two key businesses, domestic e-commerce and cloud computing, both performed poorly this quarter. More importantly, the decline in Taobao and Tmall Group's GMV has raised concerns about a potential loss of market share in the fiercely competitive e-commerce industry. Alibaba has been implementing a low-price strategy but it appears to be ineffective. Its Cloud Intelligence Group remains sluggish, with the only bright spot being the performance of international e-commerce. However, the entry of TEMU may change the current positive momentum.

Alibaba's current valuation is not high (corresponding to free cash flow of 7-8x), and the estimated annualized shareholder return from buybacks and dividends is around 6%. However, due to the lack of clear growth prospects and the shattered expectations for spin-off plans, as well as the founder's share reduction, market confidence is unlikely to recover in the short term. Therefore, from a valuation perspective, Alibaba does appear to be cheap, but among Chinese e-commerce peers, who aren't cheap aside from Pinduoduo? Cheapness alone is not a reason to invest; a company needs to see improvement in fundamentals to truly bring confidence to investors.