HONG KONG, Feb 21 (Reuters Breakingviews) - “If you invest with us,” Jack Ma wrote in his inaugural letter to shareholders in 2014, “you will be embarking on a journey with Alibaba.” A decade on, the invitation from the Chinese e-commerce group’s co-founder and former chairman reads more like a warning. Following its New York stock market debut later that year, Alibaba’s market capitalisation soared to reach $858 billion in 2020 only to tumble to below $200 billion today. Blame over-expansion, regulatory crackdowns, and slowing Chinese consumption. New boss Eddie Wu faces an arduous journey of his own.
A LOST DECADE
It’s hard to imagine today that Alibaba was once worth more than Amazon.com and Facebook owner Meta Platforms. The company’s 80% share of China’s e-commerce market and 50%-plus annual sales growth dazzled global investors hungry for exposure to the country’s middle class. Silicon Valley had no answer to Alibaba’s wildly popular Taobao and Tmall shopping platforms, or its Alipay affiliate which pioneered mobile wallets, digital banking, and wealth management.
The $670 billion of market value lost by Alibaba over the past three-and-a-half years is a rare recent example of a tech superstar falling to earth. Smaller rivals at home have chipped away at its dominance; analysts polled by LSEG forecast just single-digit top-line growth for the next three fiscal years. Meanwhile Ant, which operates Alipay, is worth just a quarter of the $315 billion valuation it touted before Chinese financial regulators torpedoed its 2020 initial public offering.
Investors that bought into Alibaba’s 2014 offering have pocketed a measly 10% total return; U.S. rival Amazon has returned 943% over the same period. Alibaba’s New York-listed stock now trades at just 8 times forecast earnings for the next 12 months, LSEG data shows, below state-owned industrial dinosaurs like PetroChina and China Mobile.
How did a company once seen as a consumer and technological bellwether for the world’s second-largest economy lose its shine? Lack of management discipline is partly to blame. Ma and his successor Daniel Zhang extended Alibaba’s online shopping empire into bricks-and-mortar retail, cloud computing, entertainment, healthcare and more. As of March 2023, the company’s balance sheet had expanded 15-fold since the IPO to 1.75 trillion yuan ($244 billion). Yet as Alibaba expanded it became less productive. It now generates just 50 cents of revenue for every dollar of assets, down from 60 cents in 2014, LSEG data shows.
Many bets have soured. Alibaba’s earnings plummeted 77% year-on-year to $1.5 billion in the most recent quarter primarily due to mark-to-market losses on equity investments as well as impairment charges relating to supermarket chain Sun Art and its Youku video-streaming service.
Meanwhile, nimble new entrants have challenged Alibaba’s core business. PDD won over thrifty shoppers in less affluent Chinese cities while Douyin, the short video app owned by TikTok parent ByteDance, has emerged as a formidable e-commerce competitor. Alibaba’s market share in online shopping at home is roughly 40%, per Insider Intelligence. And it remains a laggard overseas, even as retailers including PDD’s Temu and China-founded Shein take Western markets by storm.
HARD RESET
Alibaba’s initial response was to break itself into six parts to give each business more autonomy while unlocking value. Shareholders initially cheered, but China’s subsequent stock market rout forced a rethink. Foreign investors have been net sellers of Chinese equities for six consecutive months. U.S. technology restrictions have darkened the prospects for a standalone Chinese cloud and artificial intelligence business. Sell-side analysts once pegged the unit as Alibaba’s most valuable after e-commerce. But a recent sum-of-the-parts analysis from China Merchants Securities ascribes a value of just 55 billion yuan ($7.6 billion) to the cloud business, less than 3% of the total.
Weak and opaque governance has not helped. Internal power struggles broke out following the separation of business units, the Financial Times reported, citing insiders. One between Zhang and Wu, an Alibaba co-founder, has been particularly disruptive. In June, Zhang announced he would step down as group CEO and chairman to lead the cloud unit; less than three months later, he abruptly quit.
Yet outsiders still have no insight as to who is in charge. Alibaba is effectively controlled by a partnership that nominates most of the company’s directors. Both Zhang and Ma, who stepped down as chairman in 2019, are still members. Bafflingly, Alibaba says Zhang is still contributing to the company by “channeling his expertise differently” and has committed $1 billion to a fund its former boss will establish.
The status of Alibaba’s restructuring is equally unclear after the company nixed the cloud spinoff and suspended the IPOs of its logistics and grocery arms. Wu now heads the domestic e-commerce and cloud businesses in addition to his role as group CEO. He has promised significant and sustained investment in the two divisions to revive growth, while the company plans to spend $12 billion a year buying back its shares.
Wu may have to prioritise, however. Alibaba’s operating net cash flow fell 26% year-on-year to $9 billion in the December quarter, while free cash flow shrunk by more than 30%. Moreover, strict antitrust rules and regulatory scrutiny in China will make it hard for the company to recapture lost market share.
Ultimately, Alibaba’s fortunes are tied to those of the Chinese consumer, just as they were a decade ago. Policymakers’ efforts to revive confidence and stimulate domestic consumption are so far piecemeal. Gambling on an Alibaba turnaround is therefore the ultimate contrarian bet on China’s economy. That’s a journey many investors may not want to embark on.
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