Fiscal year 2022: a year to transition from Alibaba

Last fiscal year was tough for Chinese tech conglomerate Ali Baba (BABA 4.92%). The scrutiny of Chinese and US regulators (albeit for different reasons), competition from start-ups like Pinduo-duo and Douyin, and weaker financial performance are just some of the challenges the tech company has faced.

Unsurprisingly, investors have become increasingly pessimistic, causing Alibaba’s share price to fall more than 50% in the past 12 months. Let’s explore why the company’s latest annual results make fiscal 2022 a year the Chinese tech giant probably wants to forget.

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Alibaba hit multi-year low in growth rate

Alibaba was once a darling among investors, especially those who wanted to cash in on the growth of China’s tech industry. A few years ago, it was the undisputed market leader in areas such as e-commerce and fintech, as well as a top – and rapidly growing – competitor in areas like cloud computing. Since its IPO in 2014, the company has grown its revenue by more than 30% per year, and even exceeded 50% growth in some years.

However, that impressive streak came to a halt in the company’s 2022 fiscal year, which ended March 31. While it achieved its usual growth rate of over 30% in the first half of the fiscal year, in the second half the growth was only less than 10%. In the fourth quarter, revenue rose just 9%, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell 30% year-over-year. As a result, its full-year revenue growth rate fell to 19%, the company’s weakest result since its IPO.

This slower revenue growth reflects the many challenges facing Alibaba. Top of the list is the threat to its crown jewel e-commerce business from start-ups like Pinduoduo. For perspective, Alibaba’s business activity grew by just 18% in its fiscal year 2022 – and much of that growth came from its acquisition of supermarket chain Sun Art Retail. Additionally, Ant Group, the fintech subsidiary of Alibaba, has come under intense scrutiny from Chinese regulators, which has forced the payments company to put plans for a 2020 IPO on hold. Even revenue growth at its rising star business, Alibaba Cloud, slowed to 23% in fiscal 2022.

Investors shun Alibaba

It has been notoriously difficult to successfully invest in Chinese companies. Cultural differences, poor corporate governance and oversight, and issues with the country’s unpredictable government are just a few significant obstacles. Still, investors can’t ignore the huge opportunity China presents, especially as the nation of 1.4 billion people is rapidly transitioning a large portion of its citizens into the middle class. Naturally, foreign investors have crowded into the country’s top companies, such as Alibaba and Tencent, in attempts to ride on this growth story. This strategy worked reasonably well for many years, until recently.

An increasingly divisive relationship between the United States and China, the Chinese government’s harsh crackdown on its dominant domestic tech companies, and other issues have dragged Alibaba’s stock price down recently. The tech company’s stock hit $73 at one point this year, down more than 75% from its high of $317. Currently, it is trading at around $110. He also lost the support of many investors, including one of his most ardent supporters, Charlie Munger, who halved the Daily newspaperAlibaba’s position at the beginning of this year.

The drop in Alibaba’s stock price reduced its price-to-sales ratio to around 2. For perspective, the price-to-sales ratio had reached 18 in 2017. In other words, investors value the company at nearly 90%. discount to its record valuation, underscoring their extreme pessimism about the company.

What to expect for fiscal year 2023

Overall, fiscal 2022 has been a lousy one for Alibaba and its investors. And although I’m hopeful, I don’t think the situation will turn around overnight.

First, China’s zero-COVID policy will likely necessitate further periods of restrictions that will continue to affect its domestic economy, impacting Alibaba’s growth. Moreover, while the most intense period of Chinese regulatory scrutiny of big tech companies may be over, the crackdown will likely continue for some time.

In addition, Alibaba’s international expansion efforts could face headwinds due to geopolitical uncertainties and a weak global economic outlook. Understandably, Wall Street growth estimates for Alibaba in its 2023 fiscal year remain low at 8%.

In summary, while Alibaba shareholders might want to put the last fiscal year behind them, this fiscal year will likely also be a bleak time for the company. But looking on the bright side, analysts still expect Alibaba to grow, and some growth is better than none.

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