Alibaba’s Recovery: A Look at the E-commerce Giant’s Future Prospects

Alibaba (NYSE: BABA) is commonly viewed as a key indicator of China’s economic health. The company operates the largest e-commerce platforms in the country alongside a leading cloud service. Additionally, it has a presence in physical retail, logistics, and digital media.

Over the past decade, Alibaba has experienced significant growth. From fiscal 2014 to 2024 (ending in March), the company’s revenue grew at a compound annual growth rate (CAGR) of 33%, while adjusted net income rose at a CAGR of 19%. The stock initially priced at $68 per American depositary share (ADS) during its September 18, 2014 IPO, peaked at $306.16 on October 27, 2020.

Image source: Getty Images.

Currently, Alibaba’s stock hovers around $113, having lost over 60% of its value due to various macroeconomic, competitive, and regulatory pressures. While these challenges persist, there are several reasons to believe Alibaba is on the verge of recovery.

1. Addressing Major Challenges

In 2021, Alibaba faced significant obstacles when Chinese antitrust regulators fined the company a record $2.75 billion. They also implemented restrictions, preventing the e-commerce giant from binding merchants to exclusive agreements or engaging in aggressive promotional strategies. These setbacks created opportunities for smaller competitors like PDD and JD.com.

Simultaneously, Alibaba struggled with the aftermath of China’s “zero-COVID” policies which stunted economic growth across multiple sectors. Despite these regulatory hurdles, Alibaba has now moved past these initial challenges. Recent economic stimulus measures from the government may also help stabilize the market. Thus, while competition remains a concern, there is optimism for recovery in Alibaba’s core operations as external pressures ease.

2. Renewing Growth Momentum

Alibaba’s growth slowed during fiscal years 2022 and 2023 due to ongoing regulatory and macroeconomic issues. However, fiscal 2024 has seen a resurgence in revenue and adjusted net income growth.

Data source: Alibaba. FY = fiscal year.

This regained growth has been driven partly by faster performance in overseas markets, including Lazada in Southeast Asia, Trendyol in Turkey, and AliExpress for global sales, which mitigated slower growth in Taobao and Tmall within China.

Furthermore, Alibaba’s Cainiao logistics division has developed into a vital source of revenue by providing services to external clients, while the cloud infrastructure business has stabilized after earlier slowdowns due to budget cuts by many customers.

Looking ahead, analysts forecast Alibaba’s revenue and net income to achieve a CAGR of 8% and 21% respectively from fiscal 2024 to 2027. Although growth may not compare to that of the previous decade, Alibaba remains a dominant player in China’s e-commerce and cloud sectors.

3. Generating Strong Cash Flow

Despite a slowdown in top-line growth, Alibaba is committed to returning cash to investors. In fiscal 2024, it repurchased $12.5 billion of its shares and introduced an annual cash dividend of $1 per ADS. Additionally, the company paid a special one-time dividend of $0.66 per ADS in June. Although the forward yield stands at 1.8%, its low payout ratio of 51% affords substantial potential for future dividend increases.

4. An Attractive Valuation

Lastly, Alibaba’s stock valuation appears appealing at 15 times next year’s earnings. If the government’s stimulus proves effective in revitalizing the economy, it could lead to an expansion in Alibaba’s e-commerce and cloud businesses, ultimately increasing valuations.

Following a challenging period over the past four years, Alibaba again presents itself as a compelling investment opportunity. While stock performance may fluctuate as the market responds to new economic policies, the outlook appears promising as the company navigates its obstacles.

Is Alibaba a Smart Investment Right Now?

Before investing in Alibaba Group, consider the following:

The Motley Fool Stock Advisor team recently shared their picks for what they believe are the 10 best stocks to buy right now, and Alibaba Group did not make the list. The selected stocks are anticipated to deliver substantial returns over the coming years.

Reflect on Nvidia’s experience when it made the list in April 2005; if you had invested $1,000 at that time, it would now be worth approximately $814,364!

Stock Advisor offers investors a clear and actionable strategy for success, including advice on portfolio management, frequent insights from analysts, and two new stock recommendations each month. Since 2002, the Stock Advisor service has significantly outperformed the S&P 500.

Explore the 10 top stocks »

*Stock Advisor returns as of October 7, 2024

Leo Sun has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool operates under a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.