China’s Tech Giant At A Discount: What’s Holding Alibaba Back?

Chinese e-commerce and cloud behemoth Alibaba stock stock has gained about 12% since early 2024 but remains down over 70% from its 2020 highs. The stock trades at a reasonable $85 per share, equivalent to less than 10x projected FY’25 earnings. In comparison, Amazon trades at approximately 36x forward earnings. Alibaba also holds about $50 billion in net cash—roughly a quarter of its market value—bringing the ex-cash multiple down to under 8x. So, what factors are holding the stock back, and what are the potential catalysts for recovery? Separately, SNOW has lagged. See Snowflake Stock: Melting Expectations Or Temporary Setback?

What’s Held Alibaba Stock Back of Late?

Alibaba reported better-than-expected Q2 FY’25 results, with revenue rising 5% year over year to 236.5 billion yuan (approximately $33.7 billion) and net income surging 58% to 43.9 billion yuan (around $6 billion). However, China’s retail market remains weak due to mixed consumer sentiment and slowing economic growth following the real estate crisis. This has impacted spending, particularly on discretionary items. Increasing competition in the e-commerce space has also proved a challenge for the company. PDD, the owner of discount platforms Pinduoduo and Temu, has gained traction as Chinese consumers have turned a bit more value-conscious on account of the sluggish economy. Revenue from Alibaba’s Taobao and Tmall online marketplaces grew by just 1% year-over-year to $14.1 billion in Q4 FY’24. Concerns about a mixed recovery in consumption could linger, potentially exacerbated by higher U.S. tariffs and the risk of an escalating U.S.-China trade war as Donald Trump assumes the U.S. presidency.

Trends That Could Help Alibaba

Since late September 2024, China has introduced substantial stimulus measures and interest rate cuts, which could help to stimulate economic growth and consumer spending. Alibaba has also been tweaking its fee model and recently replaced its annual fixed service fee for vendors with a 0.6% software service fee on gross merchandise value for transactions on Tmall and Taobao. This move could enhance revenue from its core customer management services, following significant investments in its platforms and technology. The company’s digital marketing tool, Quanzhantui, is also expected to boost monetization for Taobao and Tmall marketplaces.

Alibaba’s cross-border e-commerce platforms, AliExpress and Trendyol, have emerged as key growth drivers, with revenues soaring nearly 29% to $4.5 billion in the most recent quarter, led by the strong performance of initiatives such as the AliExpress Choice program which offers free shipping and other services. Growth in the international business could help soften the weakness in China in the interim. Alibaba is also adjusting its broader e-commerce strategy to emulate value-focused competitors like Pinduoduo.

While Alibaba’s cloud computing business saw a slowdown post the Covid-19 pandemic due to waning demand for computing power associated with remote work, and remote education, things have been getting better. Over the last quarter, the company’s Cloud Intelligence Group has returned to growth, with sales rising 7% year-over-year to 29.6 billion yuan ($4.2 billion), driven by strong public cloud growth and a triple-digit increase in AI-related product revenue. There’s a possibility that the company’s AI initiatives could potentially see backing from the Chinese government, amid U.S. restrictions on advanced semiconductor chip exports to China and the growing geopolitical importance of AI. In the AI space, Alibaba is developing open-source large language models, allowing developers greater flexibility to build custom solutions using its technology. This strategy could encourage developers to adopt Alibaba’s cloud services for deploying these models.

Notably, BABA stock has performed worse than the broader market in each of the last 4 years. Returns for the stock were -49% in 2021, -26% in 2022, -11% in 2023, and 12% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could BABA face a similar situation as it did in 2021, 2022, 2023, and 2024 and underperform the S&P over the next 12 months – or will it see a recovery?

We estimate Alibaba’s valuation at about $108 per share – indicating a 27% upside from the market price of about $85 per share. See our analysis of Alibaba revenues for more details on how Alibaba’s revenues are likely to trend.

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