Key Takeaways
- Alibaba finds itself at a strategic crossroads, attempting to balance substantial shareholder returns through buybacks and dividends with the heavy reinvestment needed to defend its market share in core commerce and local services.
- The Cloud Intelligence group has returned to double-digit growth, fuelled by demand for AI services, yet this has been achieved through aggressive price reductions, placing pressure on profitability amid fierce competition.
- Despite a historically low valuation, the stock is weighed down by the perception of being a ‘value trap’, a narrative the management is fighting with capital allocation rather than a simple growth story.
- The international commerce division (AIDC) remains a powerful and perhaps underappreciated growth engine, delivering rapid expansion that provides crucial diversification away from the saturated domestic market.
Analyst price target adjustments, such as Jefferies’ recent trim for Alibaba to $150, often reveal more about a company’s strategic tensions than its immediate prospects. The rationale points to a familiar conflict: strong momentum in high-growth segments like cloud computing is being offset by the considerable EBITA impact of investments in nascent areas like instant commerce. This dynamic is not merely a line item in an earnings report; it is the central question for Alibaba as it navigates a complex pivot from a growth-at-all-costs behemoth to a more disciplined allocator of capital, all while fending off relentless domestic competition.
The Great Rebalancing Act: Shareholder Returns vs. Reinvestment
Under new leadership, Alibaba has executed a marked shift in capital allocation strategy. The primary focus is now on enhancing shareholder value through tangible returns, a direct response to years of share price underperformance and the persistent ‘value trap’ label. For the fiscal year ended March 2024, the company repurchased $12.5 billion of its stock and approved a $4 billion dividend, signalling a firm commitment to this new doctrine. [1] This is not window dressing; it is a fundamental attempt to provide a floor for the valuation by focusing on cash generation and return. However, this strategy exists in direct tension with the competitive reality on the ground. Defending its moat requires substantial and often margin-dilutive investment, particularly in the local services arena where rivals like Meituan dominate.
A Granular Look at the Business Units
Understanding Alibaba requires dissecting its sprawling empire, as the performance of its constituent parts is becoming increasingly divergent. The consolidated view masks the underlying strengths and weaknesses that will ultimately determine its trajectory.
Taobao and Tmall Group (TTG): The Core Engine Under Siege
The traditional heart of the business, domestic e-commerce, faces an unprecedented competitive assault. The rise of PDD Holdings (Pinduoduo) with its low-price strategy and the encroachment of content-commerce platforms like Douyin have eroded TTG’s once unassailable position. In response, Alibaba has pivoted its strategy to prioritise price competitiveness and user experience. While revenue for the segment grew a modest 4% year-over-year in the March 2024 quarter, the focus on defending market share in a slower-growing consumer environment remains paramount. [1]
Cloud Intelligence Group: A Fragile Recovery
After a period of stagnation, the cloud business has shown signs of life, posting 11% year-over-year growth in its most recent results. [1] This recovery is largely attributed to renewed demand for public cloud services and the burgeoning market for AI infrastructure in China. Yet, this growth has come at a cost. To regain momentum, Alibaba initiated significant price cuts on its core cloud products early in 2024. While this may stimulate adoption, it also compresses margins in a field crowded with formidable competitors, including Tencent Cloud and Huawei Cloud, making the path to sustained, profitable growth a challenging one.
The Investment Drag: Cainiao and Local Services
The source of the EBITA pressure cited by analysts resides squarely within the group’s logistics and local commerce arms. Cainiao, the logistics unit, continues to invest heavily in its global network, which impacts short-term profitability. More significantly, the Local Services Group, which includes Ele.me, remains a substantial cash drain as it battles for position in the food and grocery delivery market. These are not discretionary expenditures but necessary strategic costs to maintain relevance in China’s all-encompassing digital ecosystem.
AIDC: The Unsung Growth Story
Perhaps the most compelling part of the current narrative is the Alibaba International Digital Commerce (AIDC) group. Comprising platforms like AliExpress, Trendyol, and Lazada, this segment is delivering spectacular growth, with revenue surging 45% in the latest fiscal year. [1] AIDC’s cross-border model and the success of platforms like AliExpress’s Choice are capturing a significant share of the global fast-fashion and consumer goods market, offering a vital source of growth and diversification.
Valuation: A Deep Discount with Good Reason
On most conventional metrics, Alibaba appears exceptionally cheap. Its forward price-to-earnings ratio languishes in the single digits, a steep discount to global technology peers and even some domestic rivals. This valuation reflects deep-seated investor scepticism born from regulatory crackdowns, geopolitical overhang, and the ferocious competitive landscape.
| Company | Market Cap (USD) | Forward P/E Ratio | Revenue Growth (FY24 YoY) |
|---|---|---|---|
| Alibaba (BABA) | ~$185 Billion | ~8.5x | 8% |
| Tencent (TCEHY) | ~$450 Billion | ~15x | 6% |
| JD.com (JD) | ~$44 Billion | ~9x | 3.7% |
| PDD Holdings (PDD) | ~$198 Billion | ~17x | 90% |
Data as of late May 2024. Sources: Yahoo Finance, Company Filings. Growth figures are for the most recent full fiscal year.
The question for investors is whether the massive capital return programme is sufficient to override these concerns. The bull case rests on the idea that at this valuation, you are paying a fair price for the embattled core commerce business and getting the cloud, international, and logistics arms for free. The bear case argues that the core business is in secular decline and the other units lack a clear path to market-leading profitability.
A Concluding Hypothesis
The market is unlikely to reward Alibaba with a significant re-rating based on a complex sum-of-the-parts argument, especially after the initial spin-off plans were shelved. Instead, a more plausible speculative hypothesis is that the stock will remain range-bound until one of two scenarios unfolds. Either the capital return programme becomes so large and sustained that it forces a re-appraisal on a cash-yield basis alone, or the international commerce wing (AIDC) grows to a scale where its contribution to growth and profit becomes impossible to ignore, effectively creating its own distinct investment narrative separate from the domestic struggles. The latter seems the more probable long-term catalyst, but it requires patience as the company continues to pour capital into both its international ambitions and its domestic defensive manoeuvres.
References
[1] Alibaba Group. (2024, May 14). Alibaba Group Announces March Quarter and Full Fiscal Year 2024 Results. Retrieved from https://www.alibabagroup.com/en/news/press_pdf_1715682855.pdf
[2] Yahoo Finance. (2024). Alibaba Group Holding Limited (BABA). Retrieved from https://finance.yahoo.com/quote/BABA/
[3] Li, C. (2024, March 21). Jefferies maintains Buy on Alibaba shares, lowers price target. Yahoo Finance. Retrieved from https://ca.finance.yahoo.com/news/jefferies-maintains-buy-alibaba-shares-161007523.html
AIStockSavvy. (2024, May 14). [$BABA | 𝐀𝐥𝐢𝐛𝐚𝐛𝐚 (BABA): Jefferies maintains 𝐁𝐮𝐲, lowers 𝐏𝐓 𝐭𝐨 $𝟏𝟓𝟎 (𝐟𝐫𝐨𝐦 $𝟏𝟓𝟑)]. Retrieved from https://x.com/AIStockSavvy/status/1925286876186808565
