Alibaba's deteriorating business quality

Alibaba just traded at $104, up $12 on the day. That’s a PE of only 12 against it’s peak earnings (from 2021) of $8.54 per share. On the surface that seems super cheap, given it’s history of extremely rapid growth. But there are two problems. First is the last two quarters have seen BABA’s revenues shrink*. But more importantly BABA’s entire history shows troubling signs of a massive ongoing decline in business quality.

I believe that BABA has been sustaining a higher growth rate by acquiring worse business over time (whether through acquisition or organic growth doesn’t matter). IMPORTANT: To illustrate this, I summed every three years increase in revenues (such that 2013 covers 2011 to 2013, etc), and calculated operating and net profits over those three year sums. I did this to smooth out year to year variations. The margins you see are calculated for that three year tranche of new business.

This shows how gross and net margins of new business has plummeted over the last decade.

To make it even clearer, here are the same values charted with BABA’s three year averaged growth rate (blue line).

So growth has been slowing for some time, but margins of the added business keeps declining. I don’t know whether the primary cause is that new customer acquisition keeps getting harder over time due to the volumes they now need, or whether they were buying low margin businesses to keep that growth line from collapsing itself. Whatever the cause it looks like they have now hit the wall, with negative growth over last two quarters.

** EDIT: My bad, when I first wrote this I had forgotten about Zero COVID, obviously BABA’s last two quarters declined because of the Chinese lockdown. But this may also play into my thesis. A purely online business probably should not have declined, during 2020-2021 online businesses surged in the US. This may be more evidence that BABA has been maintaining growth by buying lower margin brick and mortar businesses.