阿里巴巴的小小報告

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Alibaba (BABA) stock appears to be recovering from its prolonged 2021 selloff. Closing at $165 on Friday, it was up 19% from its yearly low. BABA still has a long ways to go before it reclaims its all-time high of $316. But it is beginning to look like the worst of the selloff is over.

Why is that the case?

In the past month, the news about Alibaba has been more positive than negative. Among other things, we learned that:

Charlie Munger had doubled down on the stock, buying in at around $145.

The company had cracked the top three eCommerce firms in Europe.

Former CEO Jack Ma had made appearances in Europe and Hong Kong.

These news stories appear to have ignited investor confidence in BABA stock. For much of the year prior, the news was bad, with stories of billion-dollar fines, forced donations and government crackdowns dominating the headlines. News of Munger’s buy and Jack Ma’s re-emergence helped reverse the bleeding. However, these stories paled in comparison to the excitement generated by Alibaba’s most recent announcement:

The Yitian 710 chip.
The Yitian 710 is a new chip set that will be used in BABA’s Panjiu servers. Much like Amazon (AMZN), to which it is often compared, Alibaba is in the process of building a cloud business. The Cloud is the closest to profitability of all of Alibaba’s non-core businesses, with ¥340 million in adjusted EBITDA (roughly US$53 million). Not only is this business close to generating positive EBITDA, it’s also growing like wildfire. Revenue in the segment was up 29% year-over-year in the June quarter, and 50% in the 2021 fiscal year.

This is extremely strong growth. And it could get even stronger. Just recently, Alibaba Cloud locked down the Malaysian government as a client. It was a major deal that promised to bring in millions in annual revenue. And now, with the Yitian 710 chip in the picture, things could really heat up. In this article I will develop a bullish thesis on Alibaba, one centered primarily on the strength of the cloud business and the new Yitian 710 chip.

Primer on Alibaba Cloud
Alibaba’s cloud business is known as Alibaba Cloud (“Aliyun” in China). Like the U.S. cloud giants--AWS, Microsoft (MSFT) Azure, Google Cloud (NASDAQ:GOOG) (NASDAQ:GOOGL) -- it provides infrastructure for people to build on the web. Alibaba’s cloud provides all the infrastructure needed to build and deploy applications. These include:

Web hosting.

Back end servers for applications.

Remote computing (e.g. Windows desktops you can access in the cloud).

MySQL and other databases.

Migration services for bringing on-site databases to the Cloud.

Pretty much all cloud services have these features in common. Usually, each company’s cloud offering will have special perks. AWS offers a diverse array of services, Azure can get you discounts on Microsoft products, and so on.

In Alibaba’s case, the main “perk” to date has simply been pricing. Alibaba Cloud offers web hosting from as little as $4.90 per month, and its payment terms are the most flexible in the business. It also has the benefit of local market expertise in China, where it is the clear market leader. These are real benefits, but compared to Amazon’s colossal app ecosystem and Azure’s integration with Microsoft products, they seem a little vague.

To some extent that’s because the other cloud services have first mover advantage. If you look at AWS’s app marketplace, for example, that’s largely a function of how many people build and develop apps for AWS. That’s not an easy advantage to replicate. But there is one area where any cloud service can stand out:

Performance
By building better data centers running faster servers with more advanced chips, you can deliver a cloud with faster performance and less downtime than the competition. This is where the Yitian 710 comes into the picture.

The Yitian 710

The Yitian 710 is a new server chip designed by Alibaba using ARM architecture. It boasts:

A 5 nanometer process node.

A 2.2 gigahertz clock speed.

128 ARM cores.

60 billion transistors.

96-lane PCle 5.0.

8 DDR5 channels.

These are pretty impressive specs for a processor. For comparison, Apple’s (AAPL) M1 Max--widely received as an impressive chip when it was announced--has 57 billion transistors and 32 cores in its top configuration.

It’s not a perfect comparison, because the Yitian 710 is for servers while the M1 Max is for Macs. Still, the Yitian 710 boasts some impressive numbers. Which could be a key selling point for Alibaba Cloud. Cloud services like Alibaba’s revolve around data centers. Data centers are facilities housing hundreds or thousands of servers--computers that serve data to end users. Just like other computers, servers require fast processors in order to run well. The faster Alibaba’s servers, the better the performance they’ll be able to offer to customers. This could eventually result in more new clients and higher revenue for Alibaba.

Possible Revenue Impacts of the Yitian 710
As we’ve seen, the Yitian 710 is an advanced server chip that offers high speeds. This has the potential to make Alibaba’s cloud services more appealing. Developers are always looking at load time, up time, and other related metrics to see how their apps are performing. When an infrastructure provider delivers good metrics, word gets out in the developer community. If the numbers are good, the word-of-mouth marketing can generate business.

How much business are we talking here?

Well, based on Alibaba’s full-year 2021 and June quarter earnings releases, we know:

Fiscal 2021 cloud revenue was ¥40 billion, and it grew at 50%.

June quarter cloud revenue was ¥16 billion, and it grew at 29%.

So we see two periods of strong growth but also some deceleration. Growth is still decent, but it's not as high as last year. In fact, 29% growth for a big tech cloud business is pretty disappointing. AWS, Azure and Google Cloud are all growing at close to 50%. Alibaba’s numbers make it look like the loser of the group.

This point has been mentioned in bearish takes on Alibaba before. AWS is much bigger than Alibaba Cloud, has been around much longer, yet it pulled off 39% revenue growth in its most recent quarter. If Alibaba Cloud is decelerating down to 29% in a market where 40% growth off $11 billion base amounts is possible, what does the future hold for it?

It’s not immediately obvious. But ultra-fast servers could help BABA get that growth back in line with competitors. According to Chinese economy analyst Daniel Slotta, the Chinese cloud services total addressable market (TAM) is ¥110 billion. Alibaba currently doesn’t have even half of that. If Alibaba’s new chipsets and servers were popular enough, then revenue growth could easily climb back to 50%.

With 50% growth and ¥40 billion in cloud revenue to start, it would take two and a half years for Alibaba to gobble up Slotta’s 110 billion estimated market size. That does not mean that Alibaba would have a 100% market share, because the industry would have grown as well.

So, a return to 50% growth is quite possible for Alibaba Cloud. And ultra-fast servers that never disappoint would be a perfect way to get those sales numbers up. In the developer community, word about superior performance gets out sooner or later. So there’s reason to hope that revenue acceleration could happen for BABA.

What does all this mean?

Put simply, that with the new Yitian 710 chip could be the game-changer that finally takes BABA stock back over $200. Alibaba stock is already cheap, boasting multiples like:

16 times adjusted earnings.

19.8 times GAAP earnings.

2.97 times book value.

13.4 times operating cash flow.

When you combine these multiples with 40% revenue growth (the growth rate in BABA’s total business for the trailing 12 month period), you’ve got a recipe for big gains. The problem is that with all the regulatory issues facing BABA, investors are still wary of the stock. There’s a feeling in the air that, any minute now, the CCP will drop another regulatory hammer, and destroy Chinese internet companies forever. The perfect solution to that is a bullish catalyst. And a return to 50% revenue growth in cloud computing brought on by an innovative new chip certainly looks bullish.

Risks and Challenges
As we’ve seen, Alibaba is a high growth, low-multiple stock with a new chip that could transform its cloud business. Things are certainly looking promising. But there are challenges to every investment thesis, and in this case, the risks are legion. Three of the most important ones to note are:

Continued CCP crackdowns. The CCP delivered a hail storm of regulatory nightmares for BABA this year. A $2.8 billion fine, common prosperity donations and forced asset divestitures were just a few among many such nightmares. Basically, BABA can absorb the damage that has been thrown at it so far. But if the CCP continues to push the kinds of measures it did in 2021, the thesis for investing in the stock will get weaker. No company can withstand an infinite amount of government hostility.

Delayed profitability. As of the June 2021 quarter, none of BABA’s non-core businesses were profitable. The cloud was the closest to profitability, as it had roughly $53 million in adjusted EBITDA. But adjusted EBITDA is not the same as operating profit. EBIT was still negative for the cloud segment. The more time and resources BABA pours in to developing the Yitian 710/Panjiu server, the longer it will take for the segment to become profitable. So this is one operational risk for investors to look out for.

Macro risks to China. China is experiencing a number of macro risks right now, including the Evergrande debt crisis, slowing GDP growth, and a huge miss on retail sales the month before last. Any one of these factors could compound to hurt Alibaba’s revenue. The retail sales miss, in particular, directly impacts BABA, because it pertains to how much money Chinese consumers are spending.

All of these risks are worth keeping in mind. For my money, though, they are outweighed by the bullish factors working in BABA’s favor. With low multiples, high growth and a brand new chip in the works, Alibaba stock has never looked better. I remain long, and will be long for the foreseeable future.