The Alibaba Paradox

The Hamletian question facing investors today is whether Alibaba a tech titan, a conglomerate with cloud and Uber-like services, or simply a company in decline? This is the Hamletian question facing its investors today.

Alibaba is one of the most profitable yet most mistrusted companies in global markets. The Chinese giant generates more annual profit than most tech unicorns will see in their lifetimes, holds a fortress balance sheet, and trades at a valuation reserved for distressed assets. Three years after Beijing’s regulatory crackdown and Jack Ma’s public disappearance, the question remains: is this a generational value opportunity or a permanent value trap?

Amazon of China, or Something Else?

Alibaba is often labeled the “Amazon of China,” but the comparison is only partly true. Both firms dominate e-commerce, yet they diverge sharply in how they generate profits. Amazon earns the bulk of its profit from cloud services, while Alibaba’s profits still come primarily from retail.

Alibaba has struggled to scale its cloud division, one of the reasons its valuation has eroded, while Amazon has turned AWS into the backbone of its business. And unlike Amazon, Alibaba’s main rivals aren’t in Seattle—they are in Beijing and Shenzhen. JD, PDD (Temu’s parent), and Bytedance (TikTok’s parent) are its biggest e-commerce competitors, while Uber-like delivery players challenge its logistics and local services. Alibaba is more than an e-commerce site: it is a sprawling ecosystem headquartered in Hangzhou, with arms in cloud, logistics, and services—but its dominance is no longer unquestioned.

Growth Plateau, International Push

As of FY2023, Alibaba reported sales of 870 billion RMB (around $125 billion USD). Since 2016, revenue has grown more than eightfold. But the past two years tell a different story: growth has stalled across most units, with only international commerce expanding at ~50% year-on-year. Even there, international remains a small part of overall sales and has until recently been a drag on profits.

Alibaba’s market share in domestic e-commerce is slipping. The Financial Times reported that its once-dominant grip has weakened, partly because Beijing forced it to abandon its “pick one” policy—previously a requirement that suppliers sell exclusively on Alibaba’s platforms. With vendors now free to list on JD, PDD, and others, competition has become fiercer and margins thinner.

A Cheap Giant

Shareholders have paid the price. In the last three years, Alibaba has lost 70% of its market value. Management has responded with a $35 billion buyback program and its first-ever dividend ($2.5 billion). The company also sits on net cash of ~$80 billion.

At today’s market cap of $185 billion, Alibaba’s operating businesses are valued at roughly $67.5 billion. Those businesses earned $25 billion in FY2023—making Alibaba one of the cheapest large-cap stocks in global tech. Few companies combine this level of profitability, cash generation, and balance sheet strength with such a low valuation multiple.

The Shadow of 2020

Any review of Alibaba must account for politics. The company’s fate changed after Jack Ma’s critical remarks at the 2020 Bund Summit, which triggered Beijing’s cancellation of Ant Group’s IPO—the largest planned listing in history. The episode ushered in a sweeping regulatory crackdown across China’s tech sector, with Alibaba bearing the brunt.

Though Beijing has since signaled that the crackdown is over, investors remain wary. Ant’s IPO is still on hold three years later, and Alibaba’s valuation continues to carry a political discount. Leadership has also shifted: in 2023, Eddie Wu took over as CEO, while co-founder Joseph Tsai returned as chairman. One of Wu’s first moves was shelving the subsidiary IPO plan, consolidating Alibaba’s focus back onto its core.

Value Play or Value Trap?

Alibaba as of early 2024 is a paradox. Operationally, it is a global leader with hundreds of millions of active buyers, world-class logistics, and a balance sheet most companies would envy. Financially, it is astonishingly cheap relative to its cash flows. Yet strategically and politically, it faces structural challenges: intensifying domestic competition, an underperforming cloud division, and the lingering shadow of Chinese state intervention.

For investors, the bet is binary. Either Alibaba’s valuation reflects a permanent political and strategic ceiling—making it a classic value trap—or the discount is temporary, offering one of the most asymmetric opportunities in global equities.

Prepared by George @ Argo Advisory

Argo Advisory | Published: May 2024