PDD

Pinduoduo Inc.

47.67
USD
-5.13%
47.67
USD
-5.13%
23.21 109.79
52 weeks
52 weeks

Mkt Cap 59.74B

Shares Out 1.25B

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Fiscal 2022: A Year to Move on From Alibaba

The last fiscal year was difficult for Chinese tech conglomerate Alibaba (NYSE: BABA). Scrutiny from both Chinese and the U.S. regulators (albeit for different reasons), competition from younger companies like Pinduoduo and Douyin, and weaker financial performance were just a few of the challenges the tech company faced. Unsurprisingly, investors grew increasingly pessimistic, sending Alibaba's share price down by more than 50% in the last 12 months. Let's explore why the company's latest annual results make fiscal 2022 a year that the Chinese tech giant likely wishes to forget. Alibaba registered a multiyear low in growth rate Alibaba was once a darling among investors, especially those who wanted to ride the growth of China's technology industry. A few years ago, it was the undisputed market leader in areas like e-commerce and fintech, as well as a leading -- and rapidly growing -- contender in sectors like cloud computing. Since its IPO in 2014, the company has grown revenue by over 30% annually, and even topped 50% growth in some years. However, that impressive streak was broken in the company's 2022 fiscal year, which ended on March 31. While it achieved its usual 30%-plus revenue growth rate in the first half of the fiscal year, in the second half, growth came in just shy of 10%. In its fourth quarter, revenue grew by only 9%, while adjusted earnings before interest tax and amortization (EBITDA) fell by 30% year over year. Consequently, its full-year revenue growth rate fell to 19%, the company's weakest result since it went public. That slower top-line growth reflects the numerous challenges Alibaba is facing. Topping the list is the threat to its crown jewel e-commerce business from younger companies like Pinduoduo. For perspective, Alibaba's commerce business grew by just 18% in its fiscal 2022 -- and much of that growth came from its acquisition of supermarket chain Sun Art Retail. Further, Ant Group, Alibaba's fintech affiliate, has faced intense scrutiny from Chinese regulators, which forced the payments company to suspend its plans for an IPO in 2020. Even the revenue growth of its rising star business, Alibaba Cloud, slowed to 23% in fiscal 2022. Investors are shunning Alibaba It has been notoriously challenging to invest successfully in Chinese companies. Cultural differences, poor corporate governance and oversight, and issues with the country's unpredictable government are only a few significant barriers. Yet investors cannot ignore the massive opportunity that China offers, especially as the nation of 1.4 billion people rapidly moves a large fraction of its citizens up into the middle class. Understandably, foreign investors have piled into the country's best companies, such as Alibaba and Tencent, in attempts to ride on that growth story. This strategy worked reasonably well for many years -- until lately, that is. An increasingly adversarial relationship between the U.S. and China, the Chinese government's harsh crackdown on its dominant domestic tech companies, and other issues have more recently driven Alibaba's share price back down to earth. The tech company's stock hit $73 at one point this year, down more than 75% from its peak of $317. Currently, it's trading at around $110. It also lost the support of many investors, including one of its most ardent supporters, Charlie Munger -- who halved The Daily Journal's Alibaba position early this year. Alibaba's falling stock price narrowed its price-to-sales ratio to around 2. For perspective, the price-to-sales ratio had been as high as 18 in 2017. In other words, investors are valuing the company at close to a 90% discount relative to its all-time-high valuation, highlighting their extreme pessimism about the company. What to expect for fiscal 2023 Overall, fiscal 2022 was ugly for Alibaba and its investors. And while I'm hopeful, I don't think the situation will turn around overnight. First, China's "zero COVID" policy is likely to require further periods of restrictions that will continue to affect its domestic economy, impacting Alibaba's growth. Also, while the most intense period of Chinese regulatory scrutiny on big tech companies may be over, the crackdown will likely continue for a while. Besides, Alibaba's international expansion efforts may face headwinds due to geopolitical uncertainties and a weak global economic outlook. Understandably, Wall Street's growth estimates for Alibaba in its fiscal 2023 remain low at 8%. In sum, while Alibaba shareholders might wish to put the last fiscal year behind them, this fiscal year is likely to be a sluggish period for the company too. But looking on the bright side, analysts still expect Alibaba to grow, and some growth is better than none. 10 stocks we like better than Alibaba Group Holding Ltd. When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* They just revealed what they believe are the ten best stocks for investors to buy right now... and Alibaba Group Holding Ltd. wasn't one of them! That's right -- they think these 10 stocks are even better buys. *Stock Advisor returns as of June 2, 2022 Lawrence Nga has positions in Alibaba Group Holding Ltd. and Pinduoduo Inc. The Motley Fool has positions in and recommends Tencent Holdings. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

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