Alibaba’s cave: cash and a wealth of data
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When thinking about Alibaba, many people assume that it’s “the Amazon of China”. But that comparison oversimplifies the reality. Unlike Amazon (which we also own), Alibaba doesn’t sell products directly. Instead, it sits at the centre of a vast, platform-based marketplace, connecting huge numbers of merchants with more than a billion consumers. This model enables Alibaba to facilitate huge transaction volumes without taking on the capital burden or greater costs of first-party commerce.
Alibaba is also China’s number one cloud service provider. That’s increasingly important as Chinese companies accelerate digital adoption and embrace AI at pace. Late last year, we bought Alibaba across our multi-asset portfolios . So given that the business first listed in Hong Kong back in 2007, before moving to NYSE and then becoming dual-listed in 2024, why have we bought now?
A mature platform showing signs of recovery
Alibaba’s commerce business has faced two clear headwinds in recent years: a weaker Chinese consumer and fierce competition. China remains one of the most competitive e-commerce markets in the world, with new players constantly emerging.
Even so, Alibaba’s longstanding network effect and scale remain incredibly powerful. Merchants attract buyers, buyers attract more merchants, and the flywheel reinforces itself. With more than a billion users, Alibaba has an advantage that newcomers struggle to replicate.
The company has spent the past few years expanding into food delivery and instant commerce (getting your goods less than an hour after paying) – increasingly important parts of China’s retail landscape. The strategy is clear: create a single, seamless app where users can buy almost anything and have it delivered extremely quickly. Crucially, they’re also pushing to increase the share of higher-value items being delivered through these channels, where the profit margins are much richer.
Alibaba is no longer a hyper-growth story; it’s a mature platform focused on margin expansion. Heavy investment in AI, cloud computing and international expansion in recent years had compressed profit margins, but we’re starting to see encouraging signs of a recovery. As investments stabilise and begin to pay back, we expect earnings and margins to increase from here.
Alibaba Cloud: data is the gas of the 21st century
If the commerce business provides the cash engine, we believe Alibaba Cloud is the more exciting long-term opportunity.
Alibaba holds roughly 36% market share in Chinese cloud computing, more than the next three competitors combined. Demand is strong as Chinese businesses migrate to the cloud, but the real acceleration is coming from AI adoption.
There are meaningful parallels here with the early development of Amazon Web Services (AWS). Like AWS in its formative years, Alibaba is investing heavily in infrastructure – a strategy that can frustrate investors in the short run but ultimately creates a durable competitive moat. Crucially, Alibaba has both the cashflow and balance sheet strength (it has more cash than debt) to keep funding this growth without jeopardising its broader business.
Why now? A matter of valuation and timing
Valuation was a major factor in our timing. Based on last year’s earnings, the shares look a little expensive. But looking ahead to next year, the stock trades at roughly 18x forward earnings compared to Amazon at around 26x. We’re not suggesting Alibaba should trade in line with Amazon; the Chinese e-commerce landscape is structurally more competitive. But a valuation gap that large looks excessive.
To us, the market is pricing in a significant amount of risk, which created the opportunity. If margins recover in commerce and cloud continues to scale, we believe the current discount understates the company’s long-term earnings potential.
Risk, discipline and our approach
We are fully aware that this investment comes with risks. Competition, the state of the Chinese consumer and regulatory unpredictability are very real. And then there’s the need for companies to balance discipline with the risk of getting left behind when investing in cloud and logistics. The recent downdraughts in some of the US hyperscalers after they announced huge increases in AI investment is a reminder of what happens when spending runs too far ahead of returns.
So, we’ll be watching execution closely. But the scale advantages, cash generation, and data advantage offered from its market-leading cloud position give Alibaba enviable flexibility and dominance. No management team can know what the future brings, but if the company has limited debts, strong cashflow and quality information, it has the best chance of adapting and thriving.
The views expressed are those of the fund managers, and coverage of any assets held must be taken in the context of the constitution of the fund and in no way reflect an investment recommendation. The value of investments can fall, and you may not get back the amount invested.
