The Promotional Period
On September 4, 2019, Alibaba ceased providing ADS dividends to holders of ADS and started distributing cash dividends (interest and dividends) instead. This is a massive market event. BABA’s ADR market capitalization stood at over $500 billion in mid-December, but now only a fraction of that, $321 billion or so, is left. BABA is extra-cautious here, given the company’s record of falling afoul of Chinese regulations and U.S. authorities. Alibaba is highly profitable, and there’s no doubt that many dividend-minded investors (including me) are waiting for a capital return event at some point. This will make the company less vulnerable to social pressure and allow the company to return capital more smoothly.
Alibaba’s Current Challenges
But Alibaba’s financials are also getting more challenging. A reversal of BABA’s massive scale-up is now taking place. The brand index fell to a multi-year low on the back of poor performance from a key segment (known as “Upstream Sales”). Upstream Sales revenues (of which over 60% are generated in the Greater China region) have plummeted over 25% year-over-year. This follows a 50% plunge in the same metric during Q4 2018. Given the challenges and uncertainties of a trade war with the U.S. and other U.S. trading partners (see article), it’s unsurprising that Alibaba’s revenues took a big hit during the fiscal fourth quarter, down to just 51% year-over-year. That’s a much more significant drop than expected by Wall Street, which we’re looking for 56% growth.
The Near Future for Alibaba
Alibaba (NYSE: BABA ) is one of the three Chinese internet companies (Baidu Inc (ADR) (NASDAQ: BIDU ) and Tencent Holdings Ltd (OTCMKTS: TCEHY )) that have accepted the challenge of selling products on a global scale. Alibaba’s big push is into cloud computing, and while sales of cloud services hit $1.7 billion in the last quarter (vs. $796 million in Q4 17), BABA had to build itself out a cloud infrastructure to support this growth. It has chosen to do that with the New York Stock Exchange as its customer, suggesting that it still has some growth left in it. At the same time, Alibaba has recently introduced the largest-ever foreign-exchange platform for the U.S.
The Long Term
Nonetheless, the next leg of Alibaba shares performance can’t come from politics or international trade issues. Why? Because the basics of the Chinese economy are rapidly changing. There are no longer any bright, shiny surfaces. The Chinese manufacturing giant’s stock has been supported by growth in China’s economy. That growth is now starting to show cracks. Beijing’s policies in the early 2000s when it was trying to fix the old-style Chinese economy have proven to be counter-productive. (Beijing still fiddles with anti-corruption reform. This won’t change anything, especially in the current political atmosphere.) A better way to fix the economy would be to make it simpler and more competitive. This should mean less regulation, which would also mean more efficiency