Alibaba Group Holding (NASDAQ:BABA) will report its March quarter and full-year results May 13. That winter quarter represented the height of the coronavirus outbreak in China, the e-commerce giant’s home market. At the virus’ peak there in mid February, Alibaba stock was just above $221 a share.
Investors are bracing for bad news.
Analysts think sales were just $15.84 billion. That would be down by one-third from the December quarter’s $23 billion. Yet, Alibaba is still expected to report a profit, 59 cents per share. While down from the previous quarter’s $2.80, it’s not a loss.
That could explain why Alibaba shares are only down 5.2% for the year to date, while the S&P 500 index is down 10.9%.
The good times may be about to roll again.
Cloud Investment Paying Off
China’s “cloud emperors” — Alibaba, Baidu (NASDAQ:BIDU), Tencent Holding (OTCMKTS:TCEHY) and JD.com (NASDAQ:JD) — cut spending 37% between the second and third quarters last year.
Now Alibaba is making up for that. The company has set a $28 billion capital budget for the next three years. Revenue from its cloud computing unit, which offers complete application suites, topped $1.5 billion in the December quarter.
The size of Alibaba’s investment has analysts telling Alphabet (NASDAQ:GOOGL) to watch its back. There is some truth to that. Gartner (NYSE:IT) estimates Alibaba had 9.7% of the global cloud infrastructure market last year, with 28% of the Asia-Pacific region.
But the nature of Alibaba’s cloud is more like that of salesforce.com (NYSE:CRM), with Visa (NYSE:V) thrown in. Alibaba infrastructure clears for Alipay, its phone-based payment system. Alibaba’s MYBank said it lent money to 20 million small Chinese businesses by the end of 2019. Most had no previous relationships with traditional banks.
Alibaba is best-known, like Amazon (NASDAQ:AMZN), for building out its digital infrastructure to support physical commerce. The Covid-19 pandemic has helped drive demand for e-commerce throughout the developing world. BABA has been in pole position to take advantage. Its affiliates like Daraz in south Asia, Lazada Group in Singapore, and AliExpress in Europe are all benefiting from the move to digital shopping.
The company has also become an accomplished venture capitalist. Megvii, a security start-up it helped fund, is planning a $1 billion public offering. SenseTime, now going through a $1 billion private placement, is helping China develop a “digital yuan.” This eliminates payment settlement costs. China hopes the lower costs will help it compete directly with the U.S. dollar as a reserve currency.
Problems Persist
Still, not everything at Alibaba is working.
Alibaba Pictures is still losing money. The pandemic halted sales of luxury goods. Alibaba’s TMall is having to throw a fire sale. Its Laiwang messaging app is still a poor second to Tencent’s WeChat.
China is also a more competitive e-commerce market than the U.S., which is dominated by Amazon. JD.com has Alibaba beat in delivery infrastructure. That’s why Alibaba is buying 10% of Yunda, a courier service. Many also see rival Pinduoduo (NYSE:PDD) as a better place to shop.
Bottom Line on Alibaba Stock
With co-founder Jack Ma as safely retired as Microsoft’s (NASDAQ:MSFT) Bill Gates, Alibaba has finished its transition from business to institution. Its second generation of leaders is now completely in charge. Those managers are already training their replacements.
Alibaba is not cheap. Just as many companies are flat on their back, Alibaba opens trade April 29 with a price to earnings multiple of 57.5. It has no dividend, and shares are “depository receipts.” The company has a dual-share structure, like Google, and technically doesn’t allow foreign ownership.
But Alibaba is still the most-conservative investment I can offer for access to China and visibility in the cloud. TipRanks sees its market cap growing 25% over the next 12 months, from $202 per share to a price target of $258.
I can’t disagree with them.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, AMZN and MSFT.
