Retail therapy required?

He's still a big buyer of Alibaba's shares: Charlie Munger

Founded in 2004, Facebook has already shown strains of a ‘middle-age crisis’. Feeling the pressure of slowing growth in its ‘traditional’ social media business and ‘aging’ user profiles, the American firm has launched a revamp, renamed itself Meta and bet its future on the fledgling metaverse.

Over in China, Alibaba, which began life as an online marketplace in 1998, might be feeling a tad long in the tooth as well. Similarly, the ‘aging’ internet heavyweight has been looking for a new growth engine. So much so that it has stopped talking up its core e-commerce operations in its latest earning report.

Alibaba reported last week a 74% decrease in net profit on the year to Rmb19 billion ($3 billion) for the financial quarter that ended in December. The bottom-line number was said to have come in below market expectations and analysts covering the Chinese firm were quick to describe it as the worst ever earnings report from Alibaba. Indeed, the company only posted a 10% rise in revenue to Rmb242 billion, the slowest growth in sales since going public in New York in 2014.

Adding to investors’ concern is that the reporting period in question had already factored in sales from Singles’ Day in November, which set another record and racked in nearly $140 billion in online sales.

According to news portal Huxiu, China’s biggest e-commerce firm has clearly shown signs of “fatigue”. However, the growth in active users in its ecosystems, which rose by 43 million to 1.28 billion globally (of which 979 million are in China), was one of the few positive spots that Alibaba could showcase during the recent earnings call.

The company had previously identified consumer finance as a potential growth engine. Yet after Chinese regulators stopped the IPO of Ant Group in late 2019, Alibaba spent a large part of last year revamping its fintech business in the shadow of antitrust regulators’ wrath. And in another setback a number of leading livestreaming hosts (i.e. some of Alibaba’s key partners in driving online sales) have been targeted by the Chinese government for tax evasion (top influencer Viya was given an unprecedented Rmb1.3 billion fine by the fiscal authorities).

The company’s critics – be they stock analysts or journalists – can be too harsh, Huxiu reckoned, especially given the special circumstances of this reporting period. Starting in its fiscal third quarter, Alibaba initiated segmented reporting, in which it broke down different divisions such as Chinese commerce, international commerce, cloud and its logistics arm Cainiao.

Besides ‘Chinese commerce’ – its core business – cloud computing was the only profitable unit at the Ebitda level (i.e. before interest, tax and depreciation are accounted for). Alibaba has been investing in AliCloud aggressively for 10 years and the division is starting to bear fruit, Jiemian news portal noted, given that it has emerged as a reliable partner for government agencies (despite calls for the Chinese government to create a ‘state cloud’ operated by state-owned enterprises). For instance, AliCloud was the core service provider for the 2022 Winter Olympics held in Beijing last month.

The government has just released a major planning document to speed up investment in cloud computing and data centres (see next page). AliCloud could still continue to serve as a growth engine for Alibaba, just as cloud operation AWS has contributed to the rerating of Amazon’s prospects by analysts in recent years.

After shedding more than 60% of it value over the past two years, Alibaba’s share price now hovers at a five-year low. Some investors are already seeing value in China’s biggest e-commerce firm, however. Charlie Munger’s Daily Journal Corp, for one, doubled its investment in Alibaba (again) in the third quarter of 2021.

According to Jiemian, Munger now owns more than 602,000 shares of Alibaba’s New York-listed stock, although the Berkshire Hathaway vice chairman is now sitting on a 40% loss. Munger and his friend Warren Buffett have proven their naysayers wrong many times by taking the long term view, Jiemian suggested, but only time will tell if Alibaba will prove to be the 98 year-old Nebraskan’s latest masterstroke on this score…

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