Alibaba: after the result and share price dump, here is what i think

An earnings report has triggered a major adjustment in the strategic thinking of Alibaba after top-level changes, including the founder's reduction plan, the incomplete spin-off of Alibaba Cloud, and the suspension of Hema's listing. The focus is on streamlining business priorities and restarting investments.

With a barrage of information and lackluster financial performance, the market reacted with a sharp 10-point drop.

So, is this drop justified for Alibaba? Are these changes good or bad? How should we view the long-term value of BABA-SW.HK? Here, Dolphin Research shares its thoughts.

As these are personal thoughts, they differ from the usual rigorous analysis with numbers and charts. The emphasis is on inspiring thinking. If you disagree, please just smile and move on.

1. About the sharp drop

Apart from weak performance, today's sharp drop is mainly due to the market's disappointment with Alibaba's broken promise regarding the spin-off. It is a natural reaction when the founder reduces holdings at this juncture.

If the reduction in holdings is only a matter of timing in the news release, the impact on valuation expectations is significant due to Alibaba Cloud no longer being completely spun off.

It's like previously telling the market, "We won't feed the little brother anymore. After the spin-off, it will find its own way, saving a lot of cash flow from Taobao. With the extra cash, it will fight against competitors and distribute dividends to shareholders."

Because it was undervalued, this technical adjustment could easily unlock the valuation of non-Taobao businesses by shifting the valuation from a comprehensive valuation to a segmented valuation using the SOTP method, thus increasing the market value.

Now, with the spin-off temporarily suspended, it's like saying, "Wait, let me think again. Let me find out which of these assets are core or potentially core assets. If they are considered core assets, I still need to invest in them and refuse to lie flat!"

This is a contradiction to the previous strategy. Even if there are funds that are optimistic about this operation, the expected scale of dividends will need to be reduced after this operation.

Looking at Alibaba's investment track record over the past few years:

a) Internal investments: New retail has basically failed; after investing in local life with Ele.me as the core, the gap with competitors has widened; capital has also been wasted on community group buying, which is the core of proximity retail.

1) What is the new strategy?

Let's take a look at the key information of the new strategy refined by the new management team.

a) Long-term plan: Future investments, monetization of non-core businesses, and shareholder returns.

b) Analyzing core and non-core businesses: Continuous investment in core businesses, improving profitability of non-core businesses, and monetization.

The core businesses include Taobao, Alibaba International, Alibaba Cloud, 1688, DingTalk, Xianyu, Gaode, and one more called Quark.

2) How to invest?

a) Local: Protecting the territory of Taobao

Taobao finally emphasizes "user first" instead of the strategy of wanting everything, such as live streaming, private domain, content, local retail, and price competitiveness. The first priority is now the users.

To prioritize user needs, the focus is on price competitiveness that penetrates across all user and product layers. The core goal is to concentrate all resources and efforts on the users, making clearer choices.

On the other hand, looking at the problem with Taobao: The problem with Taobao is not that users are completely disappointed and never come back. The user base is still there. The problem is that Alibaba's big marketplace has become less lively. People still come to buy, but they don't spend enough time and the frequency is not high enough.

Among the three dimensions of "variety, quality, and affordability," the affordability aspect has been replaced in users' minds. If the variety aspect is not defended, the mental differentiation will be leveled out. Therefore, the focus now is to replenish users' mental perception.

And users' mental perception is formed by looking at it occasionally and seeing the next purchase opportunity. Therefore, the goal is to increase the frequency of opening the app and increase the daily active users (DAU).

What can increase the DAU of a shopping platform?

Look at it every day: browsing products and content, essentially competing for time spent on content. The key competitor is Douyin (TikTok).

Make a purchase every day: the psychology of taking advantage of daily discounts, which applies to all user groups. Daily necessities and fresh products are the items that people need to buy every day.

Let's talk about using products to increase app DAU:

In these two directions, using content to increase the time spent on Taobao is not easy, especially since browsing does not have substantial differentiation in competitiveness. However, using products to increase DAU is something that can be done quickly.

During this period, there have been daily low prices, Taobao factories, low prices for the same products, and billions of subsidies. The focus has shifted from subsidies for high-end products like Maotai, Apple, and Huawei to daily necessities like tissues and socks. These efforts reflect the shift in traffic operations towards increasing DAU and order volume. So, from this, we can see that in this strategic adjustment, the emphasis on price power, purchase frequency, and order volume, and user priority are all a coherent and unified logic in terms of spiritual core, rather than strategies that may contradict each other when executed in different battlefields as mentioned in the five major campaigns at the beginning of the year.

Overall, in the core territory, the focus is on saving DAU and order volume (shopping frequency). This process of returning to the basics is the process of users' mental repurchase. GMV and revenue are actually secondary matters.

To some extent, this adjustment is to break free from the short-term performance hostage and fundamentally rebuild the core competitiveness of Taobao. Dolphin Research is optimistic about this.

Furthermore, let's talk about using content to increase APP user engagement:

The mental presence of browsing Taobao has gradually been eroded by TikTok and Xiaohongshu, so it is crucial to increase user engagement. However, at present, Dolphin Research has not seen a systematic approach in this direction.

Although Guanguan has been launched for two years, the unique value of its content and its differentiated positioning are not clear compared to other content consumption platforms in the same industry.

Of course, one can argue that the number of Guanguan users and their engagement are increasing, but it is important to distinguish how many are shopping users of the APP itself and how many are external users who are attracted by the good content (unique user mentality) of Guanguan.

In the short term, Dolphin Research has seen continuous adjustments to the Guanguan page, including the latest default vertical immersive short videos instead of the previous image and text display. However, there is still a lack of differentiation in terms of content, and users clearly lack the independent consumption mentality for Guanguan's content.

b) International: Expanding Territory

Dolphin Research recently had a discussion with the international business team. The overall impression is that after the new team took over, there has been a deeper consideration of the business logic and an upgrade of the business model.

The first step is to activate the DAU of existing businesses and conduct promotional activities. The methods include fully managed and semi-managed consignment models. The effects can already be clearly seen from the performance.

The second step is to attract new users when the inventory optimization is almost complete. The question is how to use a certain amount of capital for external advertising to acquire customers and expand the user base.

The third step is localization. There are two ways to approach this. One is to establish a localized team for operations and then provide localized products. The second is to directly acquire local e-commerce platforms and incorporate their teams, which is faster. This step will ultimately bring substantial rewards, but the road is challenging.

Dolphin Research believes that there is great potential in this business.

c) Looking towards the future: Alibaba Cloud

Let's focus on the "flip-flopping" of Alibaba Cloud's complete spin-off.

The original plan was that when Alibaba Cloud went public, Alibaba would distribute all of its Alibaba Cloud shares held in physical form to Alibaba's shareholders (similar to how Tencent distributed JD.com and Meituan in the form of physical dividends).

As mentioned earlier, due to Alibaba's current low valuation, Alibaba Cloud has little valuation within the group. This operation can directly and forcefully release the valuation of on-balance sheet assets through capital operations.

Now Alibaba is saying that this business is a core business and will not be completely distributed. They will retain a certain amount of equity. In Dolphin Research's view, retaining equity is actually a positive for long-term shareholders who are willing to hold onto Alibaba, because Alibaba Cloud is the underlying technological support for almost all of Alibaba's businesses.

From a strategic perspective, both AI and cloud computing are on the right track in the long term, regardless of whether they face setbacks in the short term. The market will not linearly extrapolate long-term growth based on Alibaba Cloud's short-term stagnation. By retaining equity, Alibaba is effectively safeguarding the potential long-term value of Alibaba Cloud through a strong shareholding.

However, the current issue is that the growth of the cloud market in China has reached a stage where it involves the government, semi-government entities, and state-owned enterprises (to G/semi G/SOE). Breaking through this stage may require both business capabilities and resources. It is also important to pay attention to the backgrounds of the shareholders that Alibaba Cloud may attract in the future.

d) Old Tree: Finding New Growth

Currently, the businesses that have been highlighted, such as 1688, Xianyu, DingTalk, and even Amap, all have unique market positions in their respective verticals, and they face relatively little direct competitive pressure.

Regarding 1688, Dolphin Research recently conducted a study, which focused on providing wholesale-priced goods to retail customers (to C) through fully managed logistics and marketing models.

From the current positioning of 1688's carefully selected products, it seems to be creating a brand that emphasizes quality and white-label pricing. However, based on the current form of the app, there is still room for improvement in terms of the purchasing process and experience for retail customers, as well as the richness of the product offerings and the convenience of search functions.

For those interested in 1688, you can refer to Dolphin Research's recent analysis: "1688 Carefully Selected: Will it be the 'ultimate downgrade' for the 'smart' new middle class?"

As for the other businesses, their latest status is that they have been separated into independent entities, and Dolphin Research will continue to monitor the development of these unique value businesses.

In addition, an interesting business called "Quark" was mentioned during the conference call. This business has been relatively unknown and has attracted little attention. Dolphin Research's rough judgment is that it may be related to AI.

If we compare it to Lenovo, Bing is attempting to reshape the competitive landscape of search through AI capabilities similar to ChatGPT. Therefore, there may be domestic players who are eager to try the same approach. For Alibaba, Quark seems to be a good platform to carry out this strategy.

III. Overall: Listen to what they say, observe what they do; focus on the long-term opportunities brewing in absolute undervaluation

In Dolphin Research's view, now that the various assets and strategies within the Alibaba ecosystem have been relatively "stably" clarified through top-level analysis, the chess pieces and moves have been set.

What remains is the timing of the moves and the execution capabilities. After all, no matter how good the strategy is, without strong organizational and execution capabilities, everything will be in vain. Execution is a matter of people and organizations, and now it's time for each business unit to mobilize and go into battle. In response to Dolphin Research's earnings report analysis, Alibaba has turned the tide after giving up the "big pot". When they finally turned back to strengthen the foundation of the company, they realized that the hero is past his prime, and the road ahead is a long and arduous journey.

The road ahead is long, but as long as we keep moving forward, we will eventually reach our destination. Hopefully, Alibaba is not a fallen giant of the video internet era, but a company that can regain its glory.

What does this mean for those who are concerned about Alibaba?

From a fundamental perspective, Dolphin Research believes that we should listen to their words, observe their actions, and see the results. From a valuation perspective, if Alibaba can execute well in this round, the current price drop may present a long-term opportunity to buy at an absolute undervaluation.

Risk Disclosure and Disclaimer for this article: Dolphin Research Disclaimer and General Disclosure