It mainly attributed the slowdown to macroeconomic headwinds, intense competition, and tighter government regulations. However, Alibaba's steep share price decline -- which was exacerbated by concerns about inflation, rising interest rates, and Russia's invasion of Ukraine -- has also reduced its forward price-to-earnings ratio to just 13 as of this writing. So should investors consider buying Alibaba's stock during this period of market pessimism?
Alibaba's combined commerce and cloud businesses both experienced significant slowdowns during the quarter:. During the conference call , Deputy CFO Toby Xu attributed that deceleration to the "slowing macro" environment as well as "increased competition" -- which suggests that the government's tighter oversight of Alibaba's e-commerce business has eroded its defenses against JD. As for the deceleration of its cloud business, Alibaba CEO Daniel Zhang cited "slowing demand" from internet-oriented companies as the main headwind -- which suggests that China's tighter data privacy regulations are curbing the use of its cloud-based services.
Nonetheless, Zhang said Alibaba Cloud was still experiencing "strong growth" in the financial services and telecom sectors. On a generally accepted accounting principles GAAP basis, Alibaba generates all of its profits from its Chinese commerce division.
Its international retail, cloud, digital media, and innovation initiatives units aren't profitable yet. On an adjusted earnings before interest, taxes, and amortization EBITA basis, its cloud business generates a very slim profit. In previous years, Alibaba relied on the higher-margin revenue from its domestic commerce unit to support the expansion of its unprofitable divisions.
However, Alibaba's adjusted EBITA margins withered over the past year as the regulatory, macroeconomic, and competitive headwinds squeezed its core profit engine. Source: Alibaba. That pressure will make it more difficult for Alibaba to expand its digital ecosystem. Investors should take those estimates with a grain of salt, but they do imply that Alibaba's margins could gradually stabilize over the next few quarters as it scales up its higher-growth cloud and international commerce businesses.
If Alibaba can maintain double-digit percentage revenue and earnings growth for at least a few more years, its stock will look like a bargain at its current forward price-to-earnings multiple. However, Alibaba's stock has also been bid down because it faces unpredictable regulatory headwinds in China as well as the threat of delisting from U. Those long-term risks might convince value-seeking investors to stick with American tech stocks instead. Alibaba's growth is decelerating and its margins are declining.
The headwinds it faces could be exacerbated by regulatory issues, and they could persist for the foreseeable future. Therefore, in this challenging market, I'd rather buy more promising growth stocks than roll the dice on Alibaba's recovery. Cost basis and return based on previous market day close. Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of Discounted offers are only available to new members.
Calculated by Time-Weighted Return since Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. Invest better with The Motley Fool. The volumn exceed the 90 day avewrage first time in a month! Like it EPS and revenue beat.
First profitable cloud year. Everything is looking good to me! Reply Replies 3. This comment is for everyone complaining over GAAP vs. I appreciate your input. Companies report non-GAAP for a reason as a way to "look through the noise". However I will agree that some companies use non-GAAP metrics as a way to 'hide' what is really happening. This is not the case with Alibaba and many reputable companies. It's not as though they report different 'funny numbers' on a whim!
Here is an example to show you why GAAP earnings are not useful in a company with large non-operating business-related investments. You have the same tenant and let's say that they have a year lease and that their lease is securitized by a 1, pound nugget of gold that they hold in their own secret vault. Even companies like Berkshire have poor earnings this quarter since they have to report mark to market losses on investments they still hold.
Warren Buffet and Munger both disagree with current GAAP standards but in this year's earnings call they even said that it's a tough problem to solve since industries are so different and having a standard across all of them is just not helpful. Reply Replies 7. Reply Replies 5. This marks the long time awaited reversal for Alibaba. Just to be more impartial and not to influence anything.
You know, fair guys whose main task is market and retail investor protection Good news, the key to China stock is not all the stimulus laid by Chinese Government but is really the lockdown situation in China. Shanghai has announced students would return to school started from 6th of June and 2 container quarantine camps had been closed.
This would mean Shanghai after the numerous extension of lockdown will at last lift it's lockdown as stipulated 1st of June. Reply Replies 6. Very strong results given the circumstances. Massive stimulus being introduced and zero covid Will be abandoned at some point. Things are looking up for baba. Cloud didn't grow fast - however if I hear correctly they spend up to 6 billion in new datacenters They spend about 3.
X billion in buybacks in last 2 months. Show of comments - Who would participate in stock system that didn't involve government interference? Yahoo Finance Video.
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Learn More. Alibaba 's BABA Those headline numbers were ugly, but did investors overreact and create a buying opportunity for more patient investors? Alibaba generates most of its revenue and all of its profits from its commerce segment, which operates its online marketplaces Taobao, Tmall, and others , its brick-and-mortar stores, its cross-border and overseas marketplaces, and its Cainiao logistics division.
A growing percentage of its revenue comes from Alibaba Cloud, China's largest cloud infrastructure platform. This segment is still unprofitable on a GAAP basis, but it squeezes out a very slim profit on an adjusted earnings before interest, taxes, and amortization EBITA basis.
Here's how rapidly those two businesses grew their top lines over the past year:. Those growth rates seem healthy, but the commerce segment is relying heavily on the expansion of its lower-margin brick-and-mortar, online grocery, cross-border, and logistics businesses to offset the slower growth of its higher-margin Taobao and Tmall online marketplaces in China.
That pressure caused the commerce segment's adjusted EBITA margin to decline sharply over the past year, even as the cloud segment's margins improved:. That contraction will likely continue as new antitrust rules prevent Alibaba from locking in merchants with exclusive deals. Tough competition from JD. That's troubling, because the profits from Alibaba's commerce segment support the expansion of its unprofitable cloud, digital media and entertainment, and innovation initiatives businesses.
The loss of those profits could significantly impair Alibaba's ability to expand its ecosystem. Alibaba's earnings miss and contracting margins were already disappointing, but its guidance was even worse. It reiterated that outlook in August. It attributed that big reduction to lower commerce revenue from both its direct sales and customer management listing fees and commissions revenue.
During the conference call , CFO Maggie Wu attributed that slowdown to competition from "more players" across China's e-commerce sector, and warned that those rivals had been "increasing investments to acquire users. On the bright side, Wu said the company's international business -- which mainly includes the Southeast Asian marketplace Lazada, the Turkish marketplace Trendyol, and the cross-border marketplace AliExpress -- was still generating "robust growth".
Alibaba trades at just 18 times forward earnings. Some big investors, including Charlie Munger , believe Alibaba's market dominance and lower valuations make it an undervalued growth stock. But I don't think it's a bargain, for three reasons: Its core profit engine is slowing down, its margins are dropping, and it faces too many competitors in China.
Our calculations showed that top 30 most popular stocks among hedge funds returned Unfortunately BABA wasn't nearly as successful as these 30 stocks and hedge funds that were betting on BABA were disappointed as the stock returned If you are interested in investing in large cap stocks with huge upside potential, you should check out the more diversified list of the top 30 most popular stocks among hedge funds as many of these stocks already outperformed the market since Disclosure: None.
This article was originally published at Insider Monkey. Follow Insider Monkey on Twitter. Stop investing in mediocre businesses. Buy the best, instead. The Dow Jones rallied amid encouraging inflation data. Apple stock surged. The stock market pulled back from the brink of a bear market as rate-hike expectations eased, at least for now. Here's what it will take to signal a bottom. These two fintechs are generating strong revenue growth, but have been caught up in the market swoon. The market is unstable.
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