China's Tech Giant At A Discount: What's Holding Alibaba Back?

Alibaba Stock Performance and Valuation - Alibaba stock has gained about 12% since early 2024 but remains down over 70% from its 2020 highs [1] - The stock trades at $85 per share, equivalent to less than 10x projected FY'25 earnings, compared to Amazon's 36x forward earnings [1] - Alibaba holds about $50 billion in net cash, roughly a quarter of its market value, bringing the ex-cash multiple down to under 8x [1] - The company's valuation is estimated at about $108 per share, indicating a 27% upside from the current market price [7] Financial Performance and Challenges - Alibaba reported Q2 FY'25 revenue of 236.5 billion yuan ($33.7 billion), up 5% year-over-year, and net income of 43.9 billion yuan ($6 billion), up 58% [2] - China's retail market remains weak due to mixed consumer sentiment and slowing economic growth, impacting discretionary spending [2] - Revenue from Taobao and Tmall grew by just 1% year-over-year to $14.1 billion in Q4 FY'24 [2] - Increasing competition from PDD, owner of Pinduoduo and Temu, has challenged Alibaba's e-commerce dominance [2] Growth Drivers and Strategic Adjustments - Alibaba's cross-border e-commerce platforms, AliExpress and Trendyol, saw revenue soar nearly 29% to $4.5 billion in the most recent quarter [4] - The company is adjusting its e-commerce strategy to emulate value-focused competitors like Pinduoduo [4] - Alibaba's Cloud Intelligence Group returned to growth with sales rising 7% year-over-year to 29.6 billion yuan ($4.2 billion), driven by public cloud growth and AI-related product revenue [5] - The company is developing open-source large language models, which could encourage developers to adopt its cloud services [5] Market and Economic Factors - China has introduced substantial stimulus measures and interest rate cuts since late September 2024, which could stimulate economic growth and consumer spending [3] - Concerns about a mixed recovery in consumption could linger, potentially exacerbated by higher U.S. tariffs and the risk of an escalating U.S.-China trade war [2] - Alibaba's stock has underperformed the broader market in each of the last 4 years, with returns of -49% in 2021, -26% in 2022, -11% in 2023, and 12% in 2024 [6] Strategic Initiatives and Monetization - Alibaba has replaced its annual fixed service fee for vendors with a 0.6% software service fee on gross merchandise value for transactions on Tmall and Taobao [3] - The company's digital marketing tool, Quanzhantui, is expected to boost monetization for Taobao and Tmall marketplaces [3] - The AliExpress Choice program, offering free shipping and other services, has contributed to the strong performance of cross-border e-commerce [4]