Alibaba Group Holding Ltd. (BABA, Financial) is growing into a bigger but less profitable company.
This week, the Chinese e-commerce giant had big news to tell the world. First, its e-commerce platform served 1 billion users. Second, its sales grew by 64% in local currency in the first quarter.
"Alibaba achieved a historic milestone of one billion annual active consumers globally in the fiscal year ended March 2021," Chairman and CEO Daniel Zhang said. "Our overall business delivered strong growth on a healthy foundation, with the Alibaba Ecosystem generating a record US$1.2 trillion in GMV during this fiscal year. Such achievements were built on top of clear value propositions that we offer to consumers and merchants."
The trouble is that its first-quarter earnings didn't keep up with its user base and revenue growth. Instead, they came at $1.58 a share, missing analysts' expectations of $1.79 a share and prompting a sell-off of its shares on Wall Street.
What could explain this disconnect between higher revenue growth and earnings growth? The quick answer is the souring of the company's relationship with government regulators, culminating in a $2.8 billion antitrust fine for abusing its market dominance over merchants and rivals.
For years, Alibaba has enjoyed an Amazon-style, winner-take-all position in China's fast-growing e-commerce industry, helping the company grow by leaps and bounds. In fact, Alibaba is beating Amazon.com Inc. (AMZN, Financial) in several key metrics, including gross profits, revenue growth and operating income.
| Company | Alibaba | Amazon |
| Three-year EPS growth% | 47.9 | 89.5 |
| Three-year Revenue Growth (%) | 45 | 28 |
| Three-year EBITDA Growth (%) | 38.1 | 45.2 |
| Operating Margin (%) | 16.45 | 6.63 |
Still, the souring of Alibaba's relations with government regulators has done much more than inflict financial pain for the first quarter. Instead, it has provided an opening to competitors like JD.com Inc. (JD, Financial) and Pinduoduo (PDD, Financial), eroding the company's advantage.
Alibaba's economic profit, a measure of the strength of a company's advantage, has declined from 42% in 2014 to 2.90% in 2021. That's well below Amazon's economic profit, which has been heading in the opposite direction.
| Company | ROIC | WACC | ROIC-WACC |
| Alibaba | 9.22% | 6.32% | 2.90% |
| Amazon | 13.47% | 8.12% | 5.35% |
The bottom line is regulators have changed the rules of the game for Alibaba, making it vulnerable to competition from fast-growing startups that have undermined its dominant position and profitability in one of the world's largest markets.
Disclosure: No positions.
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