Alibaba: Breaking Down The Walls

Seekingalpha2023-09-12

Jack Ma returned to China, and Alibaba underwent major organizational restructuring.Organizational silos risk weakening Alibaba's competitive advantage and data synergies.Loss-making businesses may ...

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Comments

Miker9110
2023-09-12
Miker9110
O
King19
2023-09-12
King19
A few moons ago, the same platform said Baba is a sure buy with 30% upside... nothing has changed since then 😂 except for the writings
Danielng
2023-09-12
Danielng
Typically bs. This article says everything but nothing about fundamentals. The only trap is the this writer's ass
- DKCL:
  [Happy]

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We see it will lessen its data edge and reduce cross-sell opportunities. Additionally, as a result of the organizational restructuring, its loss operating segment will confront fierce competition as it operates independently. As it loses its data advantage in comparison to its competitors, who continue to receive data and marketing support from Tencent, we are not certain that Alibaba will continue to enjoy its ultimate dominant position. With a 13x forward P/E and a 20x TTM P/E ratio, and considering its core business's declining margins, we believe the company's current valuation is too high, limiting near-term upside.However, if Alibaba's e-commerce business can identify a distinctive value proposition or service to stand out, there may be a road for it to make a comeback. However, we believe that at this time it is too early to say. We recommend investors to closely track the core business operating margin as a crucial indicator in our view.For now, we see that Alibaba's future will be quite unpredictable following its reorganization, and have advised investors to invest their money in other companies.Jack Ma's Return and Alibaba's ReorganizationJack Ma returned to China on March 27, 2023. Two days later, Alibaba (NYSE:BABA) announced a major organizational restructuring plan. The company will consolidate its operations into six main business groups: China commerce, international commerce, local consumer services, Cainiao logistics, cloud, innovation initiatives, and others. Additionally, Alibaba stated its intention to pursue IPOs for its local services group, Cainiao logistics network, and cloud business in the near future.Effects of Organizational SilosWe see Alibaba's sweeping organizational changes to reduce Alibaba's economic influence. The exact motives behind the restructuring remain speculative. However, the moves seem likely to hurt Alibaba shareholders over the long term for several reasons:Consequences for Data Synergies and Integrated BusinessesAlibaba's competitive advantage will weaken from fragmented business units:Per business analysis site iCEO, though billed as just an organizational shift, Alibaba's six segments have begun operating completely independently, including HR functions.This risks diluting Alibaba's key data advantage as an advertising-driven company. Previously, Alibaba was able to sustain its data edge by collecting information across business units.ISBISThe core domestic e-commerce began to feel the effects following organizational changes, with its EBITDA margin dropping by 120 basis points in Q2, 2023.BABAFor example, the digital media/entertainment group provided content to gather personal data and enable cross-selling. With units now siloed, data sharing and synergies decline. Alibaba's e-commerce platforms lose engagement and cross-selling opportunities from entertainment content. Its data advantages weaken as operations fragment.Similar data synergies will be lost for other business units like local services, Cainiao logistics, and the cloud.For example, the local services group acted as a grocery complement to the e-commerce platforms, driving important traffic acquisition and customer retention for Taobao and Tmall. With independent operations, Taobao and Tmall will likely see lower customer engagement and cross-selling.Additionally, Cainiao has no logistics assets and was built specifically to serve Alibaba's e-commerce ecosystem. It leveraged e-commerce data to provide competitive shipping for Taobao merchants. Once severed, merchants may find Cainiao services less cost-effective than rivals. This further weakens Alibaba's e-commerce competitive edge.We see splitting up these deeply integrated businesses hinders data sharing that fueled Alibaba's past success. It risks degrading the customer experience and competitiveness across its e-commerce operations.Impact on Loss-making BusinessesLoss-making businesses will suffer without Alibaba's capital support:BABACurrently, most of Alibaba's segments are not generating profits, and they may not be able to operate independently.For example, its digital media and entertainment group generated an RMB $1819 million loss in the last twelve months. One of its applications, Youku video, faces intense competition, with Tencent and iQIYI (IQ) collectively holding over 70% market share in China's online video sector. As the underdog, Youku relies heavily on subsidies from Alibaba, since the digital media unit remains unprofitable. Once spun off into a separate IPO, Youku would lose Alibaba's capital support. This creates funding challenges and competitive pressures against entrenched rivals.Similarly, Cainiao Logistics depends heavily on Alibaba's data and capital support, given its lack of own assets. Once severed, it loses data synergies and faces fierce competition from profitable logistics leaders like SF Express.More broadly, the split prevents segments from sharing data that previously fueled competitive advantages. Not only does this weaken their market positions, but some may face going-concern risks after being cut off from Alibaba's financial subsidies while pitted against strong industry peers.Competition Risk On the RiseDespite higher margins, Taobao and Tmall now face rising competition from Pinduoduo (PDD) and JD.com (JD) in low-growth e-commerce. Per Quest Mobile, Pinduoduo's daily active users reached 777 million in May 2023, nearing Alibaba's 895 million, with JD third at 643 million. Alibaba's scale advantage is clearly not as strong as it used to be.QuestmobileMoreover, Pinduoduo and JD are fueled by WeChat mini apps from ally Tencent shown in the above chart, while Alibaba relies entirely on its own apps for traffic. Tencent is a formidable internet behemoth in China, rivaling Alibaba. With Alibaba's current weakened stance, we anticipate the Tencent Alliance to significantly capture a larger market share from Alibaba.Valuation ConcernsAlibaba's valuation multiples have contracted over 50% versus 5-year averages.Seeking AlphaPart of the valuation compression is justified by deteriorating profitability compared to historical levels. Margins and returns on capital over the past year have fallen significantly below the prior 5-year average.Seeking AlphaWhile the stock may appear cheap based on P/E, P/S, and other typical valuation metrics, investors must also consider the long-term implications of Alibaba's strategic shifts.Some investors point to potential IPOs for Cainiao, Cloud, and Local Services as opportunities to realize value. And Alibaba may benefit from spinning off loss-making units in the short term. However, the organizational walls now hindering data sharing are a lasting negative, in our view.The stock market is forward-looking, and Alibaba's restructuring raises concerns about its long-term outlook. We believe fragmenting its synergistic business model will erode competitive advantages across segments over time. This leaves Alibaba vulnerable to fierce competition from the Tencent alliance of Pinduoduo, JD.com, and Tencent. Its loss-making units face new profit pressures once cut off from subsidies.While the political motivations are uncertain, the end result may be increased balance among China's tech giants, playing into Beijing's preferences. Regardless of motives, we are pessimistic about Alibaba's strategic direction. Hence, this signals the stock may be a value trap for investors. A stock that's a value trap might trade at a single-digit P/E ratio due to the company's eroding competitive advantage, potentially leading to a further decline in earnings. The company currently sports a 13x forward P/E ratio and a 20x TTM P/E ratio. Considering the company's declining margins in its core business segment, we believe the current valuation isn't justified. Therefore, we anticipate a limited upside in the near term.However, we might reconsider our assessment of the company's rating if it can showcase a competitive strategy under its new organizational structure or display a stabilized margin trend.ConclusionAlibaba's restructuring seems to reduce Alibaba's influence by breaking up its synergistic business model. This will likely permanently impair Alibaba's competitive advantages and growth prospects.Formerly integrated units lose data-sharing benefits and capital support. Higher growth businesses like Cloud become siloed from struggling e-commerce. Loss-making units face failure without subsidies. Cheap valuations do not offset the long-term damage.Significant uncertainty exists regarding Alibaba's future potential amid fragmented operations and intensifying competition. While assets like the cloud remain strong, Alibaba faces an uphill battle to thrive independently. Investors should avoid value traps and await clarity on Alibaba's path forward.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":219087728463984,"gmtCreate":1694514098630,"gmtModify":1694514101888,"author":{"id":"3567752887434518","authorId":"3567752887434518","name":"Miker9110","avatar":"https://community-static.tradeup.com/news/376b8215951358aaecd7891f086a6dad","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3567752887434518","authorIdStr":"3567752887434518"},"htmlText":"O","listText":"O","text":"O","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/219087728463984","repostId":2366032130,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":219079495811176,"gmtCreate":1694511924250,"gmtModify":1694511928618,"author":{"id":"4088135301967120","authorId":"4088135301967120","name":"King19","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":7,"crmLevelSwitch":0,"idStr":"4088135301967120","authorIdStr":"4088135301967120"},"htmlText":"A few moons ago, the same platform said Baba is a sure buy with 30% upside... nothing has changed since then 😂 except for the writings&nbsp;","listText":"A few moons ago, the same platform said Baba is a sure buy with 30% upside... nothing has changed since then 😂 except for the writings&nbsp;","text":"A few moons ago, the same platform said Baba is a sure buy with 30% upside... nothing has changed since then 😂 except for the writings","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/219079495811176","repostId":2366032130,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":219068087177224,"gmtCreate":1694509248244,"gmtModify":1694509607684,"author":{"id":"3567242381966976","authorId":"3567242381966976","name":"Danielng","avatar":"https://community-static.tradeup.com/news/5cd5b4aefd2b0994474d489d4d1c2904","vip":1,"hat":"https://static.tigerbbs.com/4c5ceab71416b120bab4604c0754b52a","crmLevel":7,"crmLevelSwitch":1,"idStr":"3567242381966976","authorIdStr":"3567242381966976"},"htmlText":"Typically bs. This article says everything but nothing about fundamentals. The only trap is the this writer's ass","listText":"Typically bs. This article says everything but nothing about fundamentals. The only trap is the this writer's ass","text":"Typically bs. This article says everything but nothing about fundamentals. The only trap is the this writer's ass","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/219068087177224","repostId":2366032130,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":106522689,"gmtCreate":1694511875701,"gmtModify":1694511883055,"authorId":3562114073855305,"author":{"id":3562114073855305,"idStr":"3562114073855305","authorId":3562114073855305,"name":"DKCL","avatar":"https://static.tigerbbs.com/dd89417c21cb1f3344d20430376fc28d","vip":1,"currentWearingBadge":{"badgeId":"972123088c9646f7b6091ae0662215be-3","templateUuid":"972123088c9646f7b6091ae0662215be","name":"Legendary Trader","description":"Total number of securities or futures transactions reached 300","bigImgUrl":"https://static.tigerbbs.com/656db16598a0b8f21429e10d6c1cb033","smallImgUrl":"https://static.tigerbbs.com/03f10910d4dd9234f9b5702a3342193a","grayImgUrl":"https://static.tigerbbs.com/0c767e35268feb729d50d3fa9a386c5a","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2022.08.13","exceedPercentage":"93.32%","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1100},"crmLevel":7,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":219068087177224,"type":1,"supId":0,"prevId":0,"content":"[Happy]","text":"[Happy]","html":"[Happy]"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":13,"commentSize":3,"repostSize":2,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.2","shortVersion":"4.30.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2366032130"}