Alibaba shares are falling as investors focus on bad news in the latest financial results. China’s economic slowdown continues to weigh on e-commerce and cloud computing companies as competitive threats loom. Investors don’t seem to be calming down even after the company significantly strengthens its stock buyback plan.
Alibaba’s U.S.-listed shares fell 5.9% as of 3:19 p.m. Wednesday after the company reported earnings that fell short of Wall Street expectations. Alibaba reported revenue of 260.3 billion yuan ($36.6 billion) and earnings per share of 2.37 yuan (33 cents) in the December quarter, but analysts polled by FactSet said revenue of 2.607 billion yuan ($36.6 billion) and earnings per share of 2.37 yuan (33 cents). It had expected earnings per share of 2.39 yuan (33 cents) on yuan billion.
Earnings per share fell 2% year over year, but sales rose 5%, a far cry from Alibaba’s double-digit growth days. But that’s not surprising. The economic slowdown that has hit the world’s second-largest economy over the past year has weakened the core of Alibaba’s business: consumers. Tensions between the U.S. and China over high-tech chips have also challenged the company’s once fast-growing cloud computing and artificial intelligence division, and plans to spin it off have stalled.
All of this indicates that expectations were not high among Alibaba investors, who have weathered a 75% decline in the stock price since late 2020. Alibaba sought to cheer them on Wednesday with a move to expand its share buyback program by $25 billion.
The company bought back $2.9 billion in stock last quarter and has set aside $35.3 billion for share buybacks over the next three fiscal years. This represents almost 20% of the company’s current market capitalization.
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“By leveraging our strong balance sheet and cash flow, we increased investment in our strategic priorities and improved shareholder returns…” Alibaba Chief Financial Officer Toby Hsu said in a statement. “This is a sign of confidence in our business prospects.” “Our consistent share buybacks have also reduced the number of shares outstanding, resulting in higher earnings per share and cash flow per share.”
Stocks have suffered a brutal sell-off in recent weeks, fueled by concerns about the Chinese economy and stress from its vast and debt-laden real estate sector, but they have failed to win over investors in China. It seems like there wasn’t. The decline in the Chinese stock market is directly reflected in Alibaba’s profits. The company reported a 77% year-over-year decline in net income, which the company said was primarily due to market fluctuations in the value of its equity investments.
There are many other things that can be depressing. Revenues from Taobao and Tmall, the two platforms that form the core of China’s online retail business, rose just 2% year-on-year. This is an ominous macroeconomic omen for those looking to Alibaba’s performance as a consumer bellwether.
China’s poor growth in e-commerce may also reflect increased competition from PDD
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The company owns rival Pinduoduo and US platform Temu. PDD is a more budget-friendly platform than Alibaba and has recently surpassed the company in market value, but the change reflects stress among Chinese consumers. JD.com stock
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Another Alibaba rival that could also feel the pinch from PDD fell 4.2% in early trading. PDD stock rose 0.7%.
“Our top priority is to reignite the growth of our core businesses of e-commerce and cloud computing,” Alibaba CEO Eddie Wu said in a statement. “Next year, we will step up our investment to improve the core experience of our users to drive Taobao and Tmall Group’s growth and strengthen our market leadership.”
The latter point, strengthening market leadership, appears to be directly targeted at PDD. But more broadly, the problem for Alibaba is that reigniting growth in its core business is outside of its control. Management discussed improving the user experience on a conference call with analysts, but it’s true that e-commerce will be under pressure as China’s economy remains weak. Meanwhile, Alibaba’s cloud and AI division faces headwinds from chip supply. Regulatory risks also remain.
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The stock market knows this, which is why Alibaba stock has been hammered so hard. While this looks like a great buy based on value investing metrics, it’s actually a value trap that’s been going on for investors for years. The fact that even $25 billion in share buybacks wasn’t enough to lift the mood tells you everything you need to know.
Email Jack Denton at jack.denton@barrons.com.