Alibaba Group: Stock of the Week

Key Takeaways for Alibaba Stock

- Alibaba Group has suspended the plans to spin off its cloud business, citing concerns about the chip export ban imposed on China.

- Our analysts think the market will seek clarity around the cloud unit's leadership.

- Estimates are unchanged and shares remain undervalued. But JD.com is in favor for its turnaround potential by 2024.

Alibaba (09988, BABA) recently announced that it would suspend its cloud business IPO. This news did not make the market happy. Shares were down 9% after the announcement.

Here’s Why It Matters

Initially, Alibaba had plans to fully spin off its cloud business, in a move that would have released significant value to investors. The independence of the cloud unit, separated from Alibaba, would have given the unit more opportunities to win business from the parent’s e-commerce competitors.

What led to the halt of the IPO plan was the chip export ban imposed on China by the U.S. But our analysts think this unexpected change could be attributed to the CEO of the cloud unit stepping down. This has prompted a review of the future strategy. The appointment of a new CEO will be a prerequisite to getting clarity around the corporate direction in cloud.

New Focus for the E-commerce Giant

In the face of the sudden changes, Alibaba has made commitments to monetize non-core and non-strategic investments. Yet, uncertainty looms over the timing and scale of capital returns to shareholders. In addition, as Alibaba’s focus is to invest in technology and innovation for growth. This means that in our view, stock repurchases and dividends will not be the top priority at Alibaba.

Lastly, in their latest earnings report, Alibaba has downplayed the significance of gross merchandise volume, which is a common metric for measuring online retail sales. This shift raises concerns among our analysts about Alibaba’s confidence in its GMV growth going forward. Considering these developments, estimates remain unchanged for now. Our analysts favor JD.com over Alibaba as JD.com appears to be on track for a turnaround next year.

For Morningstar, I am Kate Lin.

 Alibaba Bulls Say

-  Gross merchandise volume per annual active user was CNY 8,833 for the year ended March 2022 for Alibaba, higher than CNY 3,285 in 2021 for Pinduoduo and CNY 5,905 in 2021 for JD.com.

-  Core annual active users on Alibaba's China retail marketplaces had a retention rate of over 90% for the year ended September 2021.

-  Alibaba’s China commerce adjusted EBITA margin was 32.5%, higher than JD Retail’s 3.1% non-GAAP EBIT margin and PDD’s 12.4% non-GAAP EBIT margin for the 12 months ended December 2021.

 Alibaba Bears Say

-  Expansion of other e-commerce players could slow Alibaba's growth. Pinduoduo's active buyers have started to exceed Alibaba's since December 2020.

-  Expansion into non-physical-goods-marketplace businesses and other regions lead to lower margins and the timing of profitability of these businesses is unknown.

-  Any internet companies with traffic like Douyin and Tencent can enter the e-commerce space due to its low barriers of entry. Douyin has gained market share in the apparel and beauty space against Alibaba.