Sure Fire Way for Dragging Even $800B Titan to Mud

Alibaba is as you know, like Amazon in China. It was hit hard by the Chinese gov, because of the tech crackdown and because the former CEO Jack Ma too stood out and criticized the government. So the sales stagnate, and the stock (BABA) price went down from 2020’s high of $300 to $70 in Apr 2024 (70%? or 80% drop? I don’t know but if I am an investor, I feel it sucking), and now what? It is the end of Alibaba, or will there be a revival?

Alibaba’s situation seems like Meta’s stock crashed in 2022, but very different. First of all, PER (you know, price earning ratio. If you don’t, please read Meta article) for Alibaba is still 14 in Apr 2024, while Meta reached virtually 5 (you can read this in Meta article too).

And compared to Meta, Alibaba’s problem is not temporary, it is chronicle. Even though the stock dropped nearly 80%, still not cheap enough. The lower net income problem will continue. it started a long time ago.

They have not bought back own stocks. Compared to its IPO stock amount, it increased not reduced. When a company buys back its own stocks, it reduces the number of shares, resulting in an increase in each stockholder’s share.

These days Alibaba declared a stock buyback(Apr 2, 2024), because the stock price was historically low. And it was $4.8B (billion). It sounds gigantic, doesn’t it? but actually, it is merely 2.5% of all shares. Means nothing. Too little to give any kind of impact. If you want to buy back stock, 10% is a minimal amount that brings any actual effect. 2.5%… just a drop in a bucket.

I think the stock price will go down more. Now PER is 14, it can be 7 or less. Because it is Chinese stock. Chinese stocks tend to be significantly underrated in the US. But Alibaba is not the poor stock bullied by US investors, on the contrary, I think it is overrated.

Bad things happened before the crackdown

There are two things that contribute to the profitability problem.

1. The moat doesn’t work against price cuts.

2. Buying diversified businesses that have nothing to do with the core business, and all are making losses.

As you can see in the matrix below, the cost of revenue rate was getting worse and worse. It became twice as high. This happens when the product or service doesn’t have a moat; it can’t hold the service price. They have to significantly discount the price to sell one. This is a very bad indication. My definition of a good company is a company that has a strong USP (Unique Selling Proposition) or a moat; it can continuously raise (not decrease) the price in the future. Alibaba is the opposite of it. You could see it happening from an earlier time. The cost of revenue rate increased to 55.4% in 2020, when the stock price was at an all-time high, and investors had apparently hallucinated the value.

I know if the light (sales increase) is too bright, you can’t see the true nature.

Alibaba is an e-commerce company, but it has invested in diverse business areas from Cloud computing to healthcare. However, other than core e-commerce business, all of them are making lossesThose businesses are unrelated to the core business, and they are making losses, dragging the business down.

This is the result of only chasing sales increases, not future cash flow. The legendary SoftBank CEO Son invested heavily in Alibaba (and became the largest owner of Alibaba) because the sales kept increasing and seemed prominent. But now, even Son is heavily selling the stock. Revenue is not increasing, the cost of revenue rate is increasing, and no good thing is happening.

To sum up, it historically invested lavishly in unprofitable businesses (understandable, if you were rich, you would act like a rich person buying a big boat…) or stocks in the market, not on the main e-commerce business or stock buybacks. The company’s focus is too diverse, with almost no focus. It now has many loss-making companies, and the main business’s cost of revenue rate keeps increasing because it is not competitive anymore.

Focusing on what you are good at is very important. For example, the Chinese e-commerce rival PDD, which focuses only on e-commerce, exceeded Alibaba’s value even though it started way after Alibaba.

What do you think? Is there any room for a turnaround? Maybe the non-main businesses could become profitable someday. I don’t call it an investment; it is a gamble. Investment is like, “This business is making this profit, and the growth rate is this, so we can collect the investment capital within 3 years”. If it is an investment, they can plan specifically. Buying unrelated, loss-making businesses – maybe some of them become profitable, but nobody knows. In my definition, it is not an investment.

I hope I’m wrong.