Alibaba (BABA 1.93%), once a Chinese growth powerhouse, faced a turbulent period as revenue growth fell to an all-time low in the fiscal year ending March 31, 2023. As its financial performance deteriorated, Alibaba's stock price fell to lows unseen in recent years.
Still, the latest quarter shows glimmers of hope with a reacceleration of revenue growth and improved profitability across its divisions. Is the worst over for the company? And more importantly, is the stock a buy now?
This article will address those questions.
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Alibaba has demonstrated early signs of recovery
Alibaba is a classic example of a fallen angel. Since going public in 2014, it has grown revenue by more than 30% annually. But everything changed in the last two years as the company faced a series of challenges, including a crackdown by the Chinese government, a COVID-19-induced slowdown, and competition from Pinduoduo and Douying.
Alibaba's result for the fiscal year ended March 31, 2023 reflected these challenges when revenue grew by just 2%. Worse, its crown jewel, the Chinese e-commerce business, reported a 1% decline in revenue for that year. Such a performance was unacceptable for a company that depended on e-commerce for most of its revenue and all of its profitability .
Fortunately, there are signs that Alibaba's fiscal 2023 performance was probably a one-off event. In the latest result for the quarter ended June 30, 2023, groupwide revenue grew by 14% year over year, and operating income surged 70%. Notably, all major business divisions (except the cloud division) grew revenue by double digits. Even the flagship Chinese e-commerce division reported a 12% increase in revenue.
While still in the early days, the recent performance indicated that Alibaba's strategic restructuring effort of breaking its empire into six major units was bearing fruit. For instance, all six divisions -- in addition to reporting solid revenue growth -- reported notable improvements in profitability. In particular, Cainiao Logistic and Digital Media and Entertainment Group turned around their loss-making business in the latest quarter.
A single quarter of good performance is probably too early to declare victory. Fortunately, with the strategic restructuring plan, Alibaba has a clear plan for a full recovery.
But the turnaround work may take a while to complete
Alibaba might have a clear plan to execute its turnaround. Still, a complete reversal of the business trajectory will not take place overnight. On the contrary, it will take at least a few quarters, if not years, for the new management team to execute a complete turnaround to get Alibaba back on its high-growth trajectory.
To this end, the new Chairman and CEO, Eddie Wu, has just assumed his role and put forth a new strategic focus on winning this battle, which is to focus on delighting users and use artificial intelligence to drive business. Concurrent with his appointment was the exit of Daniel Zhang from his role as the chairman and CEO of Alibaba's cloud division. Clearly, Wu will need time to deliver results as the acting chairman and new CEO of the cloud division.
Investors must allow the new management some time to complete its turnaround work.
Alibaba's stock is trading at an attractive valuation
As of this writing, Alibaba's stock trades at around $86, just 26% above its initial public offering (IPO) price in 2014. Yet, the conglomerate's revenue has grown 15-fold in this period, from $8.4 billion in 2014 to $126 billion in 2023.
Alibaba's challenges in recent times have caused investors to be pessimistic about its future. Understandably, the stock trades at a low valuation with the stock trading at a price-to-sales (P/S) ratio of 1.8, significantly lower than its five-year average of 5.5. By comparison, Pinduoduo has a P/S ratio of 6.2 times.
Alibaba's valuation looks relatively cheap, especially for a leading technology company that still owns some of the best businesses in China.
Is Alibaba's stock a buy?
It depends.
On one hand, there are early signs that Alibaba is heading toward a recovery after it reported a respectable growth in revenue in the latest quarter. Besides, the stock is trading at an attractive valuation.
Yet the company will take some time to return to its past growth trajectory. Investing in Alibaba's stock requires investors to be comfortable with risks associated with Chinese companies, such as political risks.
Only those with the temperament to handle these additional risks and the patience to wait for the company to execute its latest strategies should consider buying the stock. Others are best advised to remain on the sideline.
