Alibaba (BABA, Financial) is a leading e-commerce and cloud computing giant which has been dubbed the “Amazon (AMZN, Financial) of China.” The company has come under intense scrutiny by Chinese regulators as part of the government crackdown on Big Tech monopolies. Investors feared the worst, and the threat of the U.S. potentially delisting Chinese stocks added fuel to the fire.
Headwinds are gradually disappearing
Investors breathed a sigh of relief when the company was fined a mere $2.8 billion in 2021 in a landmark antitrust case, which is peanuts compared to what it earns regularly. The outspoken founder Jack Ma, who went missing for a period of time after criticizing regulators, also showed back up. Alibaba stock at one point was down 69% from the highs in October 2020.
However, true relief for the stock price didn't come until last week, when China’s state media stated they are progressing towards the end of the Big Tech crackdown and a cooperation plan for U.S.-listed Chinese stocks.
“The Chinese government continues to support various kinds of businesses’ overseas listings,” regulators said in a news release, and they should “complete as soon as possible” the crackdown on the large internet companies. Chinese large-cap tech stocks were up substantially on this good news.
Alibaba also announced more good news on Tuesday, stating that they will increase their share buyback program from $15 billion to $25 billion for up to a two-year period. The stock surged 11% on the news and is up 25% over the past five days.
Munger's bet is paying off
The recent buybacks will come as good news to legendary value investor Charlie Munger (Trades, Portfolio), who added to the Daily Journal's (DJCO, Financial) position in Alibaba stock in the fourth quarter of 2021, during which shares traded for an average price of $145.
Recent earnings
Alibaba has been growing revenues at a tremendous 42% compound annual growth rate (CAGR) over the past three years. For the fourth quarter of 2021, revenue was $38 billion, an increase of 10% year-over-year, which was driven by:
- China commerce segment revenue +7% year-over-year to $27 billion
- Cloud segment +20% year-over-year to $3 billion
- Local consumer services segment +27% year-over-year to $1.9 billion
- International commerce segment +18% year-over-year to $2.5 billion
However, the company's operating income did take a major hit in the quarter with an decrease of 86%. This included a $3.9 billion impairment of goodwill related to the digital media and entertainment segment. Excluding this, income from operations would have been $5.054 billion, a decrease of 34% year-over-year. This decline was primarily due to the company's increased investments in growth initiatives and increased spending for user growth, as well as merchant support, according to Alibaba.
Final thoughts
Alibaba is a fantastic company and a true leader in China's e-commerce and cloud spaces. The company has seen a series of regulatory headwinds, which has caused the stock to decline substantially. Regulatory headwinds are gradually subsiding, and share buybacks should give Wall Street confidence. However, the firm isn’t out of the woods yet as a substantial 86% decrease in operating income doesn’t look good, even if it for a “one off” reason. The stock is undervalued relative to historic multiples, but only for those investors with a long-term view who are planning on sticking around for the company's growth investments to pay off.
