Alibaba: Struggling with Competition, Not Regulation

Alibaba’s recent financial performance has been underwhelming. Most would have attributed Alibaba’s issues to regulation. After all, it was Jack Ma who triggered the avalanche of tech regulatory actions by the Chinese Government. Ant Group, which had the potential to have the world's largest IPO, has significantly diminished due to Jack Ma's provocative speech that had severe consequences.

Prominent Taobao live streaming celebrities like Viya and Lipstick King suddenly vanished. Viya faced allegations of tax evasion, while Lipstick King disappeared for a period for displaying a tank-like object during the Tiananmen anniversary. Alibaba's renowned Singles' Day sales event in 2022 was subdued, with the company opting not to disclose the sales figures publicly.

In order to align with the Government's vision of 'Common Prosperity', Alibaba has made a commitment of 100 billion yuan to support the cause, which comes at the cost of shareholders. Furthermore, there is an impending fine looming over Ant Group.

Despite the Chinese Government's assertion that it has largely concluded its regulatory actions, investors remain cautious and less trusting than before. Lingering doubts persist, anticipating the possibility of another wave of tech regulations at any time. Business is no longer as usual for Alibaba because of increased scrutiny.

Alibaba share prices are still in the doldrums since the onset of regulations approximately three years ago, plummeting from over $300 to below $90.

Given the aforementioned factors, it comes as no surprise that a significant number of Alibaba investors attribute the company's decline to the impact of regulations.

I'd like to present an alternative viewpoint that suggests Alibaba's challenges extend beyond regulation. It is plausible to argue that even in the absence of regulatory hurdles, Alibaba's growth could have been hindered by fierce competition in the market.

To gain a comprehensive understanding, let's compare the performance of Alibaba with that of related companies. By examining various metrics such as revenue growth, market share, and profitability, we can assess the competitive landscape and its potential impact on Alibaba's growth.

To begin with, Alibaba's core segment, China's e-commerce, experienced a 1% decline in sales. Notably, Alibaba was the only company in the industry to report a dip in e-commerce growth for the fiscal year 2022. It is worth mentioning that Alibaba's fiscal year ends in March, while other companies typically end theirs in December. For the sake of convenience, no adjustments will be made, considering there are still three overlapping quarters to compare.

The primary threat to Alibaba's e-commerce dominance was Douyin, which witnessed an impressive 80% growth, reaching a Gross Merchandise Value (GMV) of ¥1.41 trillion. This surpassed the GMV of the second-largest e-commerce player, JD.com, which stood at ¥0.9 trillion last year. Douyin shows no signs of slowing down and is likely to continue capturing more market share from Alibaba.

In the international e-commerce arena, Sea emerges as Alibaba's main competitor, particularly due to their presence in the same geographical market where Lazada operates. Sea achieved an impressive 32% growth in e-commerce sales for FY22, surpassing Alibaba's international commerce, which reported a more modest growth rate of 13%.

Moving on to Alibaba's Local Consumer Services, which includes food delivery service Ele.me, it experienced a growth of 12%. However, Meituan, a competing player in the same space, outperformed Alibaba with a growth rate of 21%.

In terms of logistics, Alibaba's Cainiao, its logistics arm, achieved a growth of 21%. However, its competitor JD Logistics surpassed this growth with an impressive 41% increase.

Lastly, let's discuss Alibaba's Cloud segment, which is often regarded as a growth driver. It observed a 4% growth in sales. However, when considering the overall China cloud market share, Alibaba Cloud actually experienced a loss of about 1% market share, while competitors like Huawei and others gained a 1% increase in market share.

Alibaba's current situation appears unfavorable as it contends with competition across all its business segments. Disappointingly, the company has witnessed weaker performance in terms of sales growth and market share during FY2022. These challenges underscore the need for Alibaba to address its competitive position and take measures to improve its market standing.

Hence, I opine that the decision to split the Alibaba Group into separate businesses is primarily driven by the need to respond to competition rather than regulation. It is apparent that Alibaba recognized its diminished agility and inability to keep pace with smaller players in terms of market competition and defending its market share. As a result, the company opted for a restructuring approach to address these challenges.

Regulatory measures had a significant impact on Ant Group. Following its restructuring as a licensed financial institution, Ant Group witnessed a notable 57% decline in its profits. In contrast, other business segments of Alibaba were primarily influenced by intense competition, which had a greater impact on their performance.

In the present landscape, Alibaba is facing an increasingly challenging environment. Similar to how China is challenging the hegemony of the United States on the global stage, Alibaba, once considered an untouchable Big Tech giant in China, is now confronting formidable competitors that are challenging its dominance in the market. The evolving dynamics and intensified competition make it harder for Alibaba to maintain its previous level of influence and market position.

Therefore, it is unrealistic to anticipate that Alibaba will reclaim its past glory days. The key question that emerges is what the genuine value of Alibaba is if it cannot reach a valuation of $300. My guess for its fair value is around $130.