Alibaba’s Q1 Preview: Coping with China’s Troubled Economy

Chinese e-commerce and cloud giant Alibaba (NYSE:BABA) has had a weak performance this year, growing just about 1% since early January. By comparison, its U.S. peer Amazon (NASDAQ:AMZN) has gained 21% over the same period. Alibaba is now set to report its fiscal first-quarter 2025 results in early August, reporting a quarter in which economic data from China was mixed and competition from new e-commerce players was growing. We expect Alibaba to report revenue of about $34.5 billion for the quarter, while earnings are likely to come in around $2.10 per share, slightly below last year’s numbers and roughly in line with consensus. So what are the trends that are likely to impact Alibaba’s earnings for the quarter?

China’s economic growth has been weak, with GDP rising about 4.7% in the quarter ended in June, down from 5.3% in the first quarter, as the country grapples with a sluggish housing market and a slow recovery from strict Covid-19 lockdowns that ended more than a year ago. In addition, consumer spending and domestic consumption in China also remain weak. Retail sales recently fell to an 18-month low on deflation as companies cut prices and employers cut wages, and youth unemployment remained high at about 14% in May. That is likely to weigh on Alibaba’s e-commerce business this quarter. In the fourth quarter of fiscal 2024, revenue from the company’s main online marketplaces Taobao and Tmall rose about 4% year over year to 93.2 billion yuan ($12.9 billion). Alibaba is also seeing increasing competition in the e-commerce sector. PDD, owner of discount e-commerce platforms Pinduoduo and Temu, has been gaining market share as Chinese consumers become more price-conscious due to the weak economy.

Alibaba’s cloud computing business also saw a significant slowdown in growth, with revenue growing by only about 3% in the latest quarter. The slowdown comes as demand for computing power tied to remote work, remote learning, and video streaming declines in the wake of Covid-19 lockdowns. Still, Alibaba has indicated it intends to cut lower-margin projects from that business, while noting that growth in artificial intelligence-related products could help the company boost profitability in the future.

BABA stock has seen a steep 65% decline from $235 in early January 2021 to around $80 today, compared to a gain of around 45% for the S&P 500 over that roughly 3-year period. Notably, BABA stock has underperformed the broader market in each of the last 3 years. Stock returns were -49% in 2021, -26% in 2022, and -12% in 2023. In comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that BABA performed worse than S&P in 2021, 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been tough on individual stocks in recent years; on consumer goods giants including WMT, PG and COST, and even on mega-cap stars like GOOG, TSLA and MSFT.

In contrast, the Trefis High Quality (HQ) portfolio of 30 stocks has outperformed the S&P 500 every year in the same period of time. Why? As a group, HQ Portfolio stocks have delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride as seen in HQ Portfolio’s performance metrics. Given the current uncertain macro environment with high oil prices and elevated interest rates, could BABA face a similar situation as in 2021, 2022 and 2023? underperform the S&P In the next 12 months – will there be a recovery?

Alibaba’s valuation is also compelling. At its current market price of around $79 per share, BABA stock is trading at less than 10 times forward earnings, which we think is very fair given that the company is likely to post high-single-digit growth rates over the next two fiscal years. Alibaba has also doubled down on its share buybacks, spending around $5.8 billion to buy back 77 million American Depositary Shares in the quarter ended June 2024. Bloomberg also recently reported that Alibaba will raise its trading fees, which are the source of the majority of its revenue. Alibaba’s overall valuation compares significantly favorably to US e-commerce giant Amazon, which trades at around 42 times forward earnings, with only slightly higher near-term revenue growth forecasts. We estimate Alibaba valuation around $107 per share, up 36% from the market price of around $78 per share. See our analysis Alibaba’s revenue for more details on Alibaba’s likely revenue trends.

(1) Returns from 30/07/2024
(2) Cumulative total returns since end-2016.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.