Alibaba$Alibaba(BABA)$ $Alibaba(09988)$ 's stock price rallied 15% on May 26 after the Chinese e-commerce and cloud giant posted its fourth-quarter earnings report. Its revenue rose 9% year over year to 204.05 billion yuan ($32.19 billion), which marked its slowest growth as a public company but still beat analysts' estimates by 4.62 billion yuan. Its adjusted net income fell 24% to 19.8 billion yuan ($3.12 billion), or 7.95 yuan ($1.25) per share, but still cleared analysts' expectations by 0.78 yuan.
Alibaba's growth rates were tepid, but investors had set a low bar for the tech giant following four straight quarters of disappointing growth. Its stock price had also declined more than 55% over the past 12 months, and it was only trading at about 13 times forward earnings.
So is it finally the right time to buy Alibaba? Let's review its previous challenges, its current growth rates, and its valuations to decide.
Why did investors abandon Alibaba?
Alibaba was once considered one of the safest Chinese tech stocks to own. It operates China's largest e-commerce marketplaces, Taobao and Tmall, as well as its largest cloud infrastructure platform, Alibaba Cloud. It also owns a third of Ant Group, which controls AliPay -- one of the two largest digital payments in China alongside Tencent$TENCENT(00700)$ $Tencent Holding Ltd.(TCEHY)$ 's WeChat Pay.
However, investors abandoned Alibaba for three reasons. First, Chinese regulators hit Alibaba with a record antitrust fine, passed new restrictions against its e-commerce business, and scuttled Ant Group's long-awaited IPO. Second, Alibaba's growth decelerated as its e-commerce business faced macro and competitive headwinds. Lastly, delisting threats in the U.S. prompted many investors to shun Chinese equities.
Its Chinese commerce business remains sluggish
In the fourth quarter, Alibaba's China commerce revenue rose 8% year over year to 140.33 billion yuan ($22.14 billion), or 69% of its top line.
That growth rate was unimpressive compared to the segment's double-digit revenue growth in previous years, but it represented a slight acceleration from its 7% year-over-year growth in the third quarter. That slight improvement seemed to impress investors, even though its rival JD.com$JD.com(JD)$ $JD-SW(09618)$ recently turned in amuch stronger quarterly reportthat featured 18% year-over-year revenue growth.
During theconference call, CEO Daniel Zhang said Alibaba continued to grapple with the "resurgence of COVID and tremendous uncertainties in the global geopolitical landscape," and would focus on "high-quality growth" by exercising tighter cost controls and reining in its unprofitable businesses.
Even so, the China commerce segment's adjusted earnings before interest, taxes, and amortization (EBITA) margin still declined year over year -- from 30% to 23% -- as it ramped up its investments in its discount Taocaicai and Taobao Deals marketplaces, dealt with rising COVID-related expenses, and integrated Sun Art's brick-and-mortar stores into its ecosystem. It also expects its ongoing shift toward direct sales -- which would make it more similar to JD.com -- to keep squeezing its margins.
The overseas e-commerce segment faces tough headwinds
Alibaba initially expected the growth of its overseas marketplaces -- which include Lazada in Southeast Asia, Trendyol in Turkey, and AliExpress for cross-border sales -- to offset the slower growth of its Chinese marketplaces.
But during the fourth quarter, Lazada's growth in order volumes decelerated, while higher taxes in Europe caused AliExpress' order volumes to drop year over year. Trendyol, which grew its order volume 48% year over year, was the only bright spot in its overseas e-commerce business.
Its cloud business is sputtering out
Alibaba'scloud revenuerose 12% year over year to 18.97 billion yuan ($2.99 billion), or 9% of its top line, during the fourth quarter. That represented a deceleration from its 20% growth in the previous quarter.
Alibaba said its cloud business still experienced healthy demand across the telecommunications, financial services, and retail sectors, but a lot of that growth was offset by the softness of "select internet verticals" like online education and digital entertainment.
An unnamed "top customer in the internet industry" -- most likely TikTok's parent company ByteDance-- also stopped using its overseas cloud services over the past year. It also said the COVID-related shutdowns had delayed the completion of several hybrid cloud projects.
On the bright side, Alibaba's cloud segment squeezed out a positive adjusted EBITA margin of 1% during the quarter, compared to a negative margin of 2% a year earlier, but it remains unprofitable on a generally accepted accounting principle (GAAP) basis.
A murky outlook and unanswered questions
Alibaba declined to provide any guidance for the full year, due to the "risks and uncertainties arising from COVID-19." Analysts expect its revenue to grow just 8% for the full year as its net income (which benefits from an easy comparison against its antitrust fine last year) rises 49%.
Those growth rates look decent, but Alibaba's long-term future is still murky. Its Chinese commerce business could continue to generate single-digit growth as its cloud growth decelerates, and it still hasn't meaningfully addressed the delisting challenges in the U.S.
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