3 Reasons I'm Cautiously Optimistic About Alibaba's Recovery
The last few years have been tough for Alibaba (NYSE: BABA) and its investors as the company has struggled with multiple issues, such as intense competition, the ongoing crackdown by the Chinese government, and the weak economy.
As the company announced its latest earnings results last week, shareholders (myself included) hope to find some signs of stabilization from its recent numbers. Fortunately, some positive indicators suggest that the recovery is on track.
Image source: Getty Images.
Taobao and Tmall delivered commendable progress
Alibaba's core e-commerce business has been a massive success for most of its existence, but lately, it has faced enormous pressure from younger companies like PDD Holdings and Douying. It doesn't help that the Chinese economy has struggled to regain its prior growth momentum since the COVID-19 pandemic.
To turn around its business and grow again, Alibaba's new management team has shifted its focus to delighting its end users -- it historically focused more on serving the merchants -- focusing on areas like lower prices and better user experience by leveraging artificial intelligence (AI) and its massive supply chain resources.
While it's still early days, some green shoots suggest the company's strategy is working. In the latest quarter, the e-commerce company reported double-digit growth in online orders and a high single-digit growth in gross merchandise value (GMV). Besides, Alibaba's premium members improved by double digits to 42 million during the quarter. These improving metrics suggest a stabilizing market share (and mind share) of Chinese consumers.
A series of efforts, including more competitive prices, improving customer service, and membership benefits helps improve customer satisfaction. Similarly, AI helps in areas like user-to-product matching, further enhancing product recommendations and price competitiveness. Ultimately, all of these improvements lead to better user satisfaction.
Still, I'm closely monitoring the company's performance in the next few quarters before declaring victory.
Other ventures delivered promising improvements
While the Chinese e-commerce business remains the biggest revenue generator for the tech giant, it's increasingly relying on other segments to sustain its growth machine. The good news is that most of these younger ventures have performed well in the latest quarter.
For example, Alibaba's overseas e-commerce business segment -- led by AliExpress, Trendyol, and Lazada -- reported a solid 32% growth in revenue, thanks to the development of cross-border and local e-commerce sales. Similarly, Cainiao Logistics grew 16% during the quarter as it leveraged the growth of cross-border e-commerce deliveries .
It's also worth mentioning that Alibaba's cloud computing business is seeing growth picking up again. Revenue grew by 6%, but that figure was masked by its diversion away from low-margin project-based revenue to high-quality public cloud revenue. In fact, public cloud products grew by double digits and could improve further in the coming quarters.
Alibaba needs to grow these ventures to rekindle its high-growth trajectory and reduce its over-reliance on local e-commerce business. Besides, some of its businesses, such as cloud computing, have so much potential that they could one day surpass the e-commerce segment in size and profitability -- just like Amazon Cloud, which is the biggest profit generator for Amazon.
Alibaba is aggressively buying back stock
Another critical point to mention is that Alibaba continued to buy back significant amounts of its stock in the latest quarter, spending $5.8 billion to buy back 2.3% of its total shares. This is on top of the dividends paid earlier in June.
On one level, the share buyback improves the per-share earnings for the remaining shares, enhancing the value of the shares for existing investors who remain invested. On a deeper level, it suggests that the company is serious about its promise to enhance shareholder value.
After its recent buyback, Alibaba still has $26.1 billion authorized in its share repurchase program that will last until March 2027. If executed, this repurchase program will be highly value accretive to investors.
What it all means for investors
Alibaba's recent quarterly revenue growth of 4% is nothing to shout about. However, looking deeper into the recent numbers suggests that the tech giant is heading in the right direction in its turnaround efforts. It just needs some time for that to bear fruit.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has positions in Alibaba Group and PDD Holdings. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
