Alibaba’s (NYSE:BABA) latest earnings report is the financial equivalent of a sinking ship caught in stormy waters. The company failed to meet revenue expectations, abandoned plans for a pivotal cloud unit spin-off, and dropped hints that the turbulent geopolitical climate might jeopardize its cloud business, curtailing its bright prospects. As international capital drains from China and tensions with the U.S. persist, Alibaba’s ability to deliver significant shareholder value appears bleak, despite being undervalued based purely on fundamentals.
A Bleak Financial Picture
Alibaba’s Q2 earnings illustrate a 9% year-on-year revenue increase to $30.81 billion, falling $230 million shy of estimates. Meanwhile, Total Taobao and Tmall Group revenue rose by 4% to $13.39 billion, and Alibaba International Digital Commerce Group revenue surged by 53% to $3.36 billion. Yet, doubts loom over the sustainability of such growth, given the fierce competition posed by domestic rivals like PDD Holdings (PDD), whose exponential growth has eclipsed Alibaba’s since its inception in 2015. PDD Holdings’ stocks have consistently outperformed Alibaba’s, highlighting the formidable challenges Alibaba confronts.
Further exacerbating concerns, weak Chinese economic growth prospects present additional headwinds for Alibaba, compounded by a lack of transparency regarding its revenue generation during events like Singles’ Day. Alibaba’s attempts to prop up its shares through buybacks and the introduction of dividends offer little respite, with foreign investor exodus and Jack Ma’s divestment further dampening growth prospects.
Looming Geopolitical Risks
Alibaba’s listing on American exchanges exposes it to enduring geopolitical perils amidst ongoing U.S.-China tensions. Export restrictions on advanced chips are poised to stymie Alibaba’s cloud business, leading to the cancellation of its cloud unit IPO. This departure from its growth strategy, amidst an anemic 2% year-on-year increase in cloud business revenue to $3.79 billion in Q2, underscores Alibaba’s struggle to compete with U.S. tech giants like Amazon, Microsoft, and Alphabet.
As the tussle between economic superpowers persists, Alibaba faces sustained vulnerability, amplifying institutional investors’ China-based divestments to evade potential fallout from Sino-American confrontations.
The Irrelevance of Alibaba’s Valuation
Despite being undervalued based on fundamentals, Alibaba’s prospects for share price recovery to pre-crackdown levels remain dubious. Even with fair value projections exceeding $120 per share, the prevailing skepticism regarding Chinese equities’ ability to yield returns casts doubts on Alibaba’s valuation relevance. The stock assumes the appearance of a value trap, tipping the balance against investors.
The Unsettling Bottom Line
Alibaba’s recent earnings plunge has underscored the supremacy of geopolitical and macroeconomic dynamics over the company’s financial fundamentals. With little reprieve in sight, Alibaba might serve as a vessel for fleeting trader gains, but its long-term navigation appears increasingly uncertain, bobbing precariously within distressing waters despite its undervaluation.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
