Summary of Key Points
This article discusses the stringent demands of the capital market on internet giants and why Alibaba is relatively favored. The current market poses an “impossible trinity” challenge for these companies: they must pursue AI initiatives, limit their spending, and still see growth in their traditional businesses. Many companies, such as Tencent and Kuaishou, have seen significant drops in their stock prices due to failing to meet one of these criteria. However, Alibaba, with its strengths in AI cloud services (Alibaba Cloud), is valued much higher than its peers (with a PE ratio of 26, compared to Tencent’s 15). Nevertheless, this favoritism is not without limitations. Alibaba leads the world in capital expenditure, faces weak growth in its traditional businesses, and has recently issued additional shares, reflecting its strategy of “comprehensive layout.” While this approach aims to seize new opportunities in AI and instant retail, it also results in tight cash flows and numerous underlying concerns.
I. The Capital Market’s Impossible Task: The Dilemma for Giants
The capital market is extremely demanding of internet giants, requiring them to meet three conditions simultaneously:
1. Must pursue AI: Failing to do so means falling behind trends. For example, Pinduoduo has invested little in AI, and Tencent’s conservative AI efforts have led to a lower valuation.
2. Cannot spend too much on AI: Although Tencent increased its AI investment by 176% this year (to 52.8 billion yuan), its free cash flow turned negative, causing its stock price to drop by 4.5%. The market views excessive spending as a mistake.
3. Even with successful AI, traditional businesses must still grow: Kuaishou’s AI revenue increased by 240% to 850 million yuan, but its advertising growth was only 4%, and its profits declined by 30%, resulting in a 11% drop in its stock price.
These requirements are almost impossible for giants to fulfill. Small companies like Meitu can profit from AI with low-cost solutions, but giants must invest in computing power and infrastructure, which incurs significant expenses. Additionally, their traditional businesses face growth limitations, making it extremely difficult to meet all three criteria.
II. The Key to Alibaba’s Favoritism: Alibaba Cloud as the “Hard Currency” of the AI Era
Alibaba’s high valuation is largely due to the strengths of its Alibaba Cloud:
- Proven model: Companies like Amazon, Google, and Microsoft have seen substantial revenue growth from AI cloud services, proving it to be one of the most profitable business models in the AI era.
- Impressive financial performance: Alibaba Cloud’s external commercial revenue increased by 45% in the second quarter, with an EBITA margin rising to 12%, and annual AI-related revenue reaching 35.8 billion yuan.
- Clear competitive advantage: Alibaba’s PE ratio of around 26 is significantly higher than Tencent’s (15), and Kuaishou and Pinduodou’s ratios are even lower (below 10). The market is willing to pay for the potential of Alibaba Cloud’s future prospects.
III. Limited Favoritism: Three Hidden Concerns for Alibaba
Despite its high valuation, Alibaba has several major issues:
1. Excessive spending: Its annual capital expenditure of 120 billion yuan (400 billion yuan more than Tencent’s) and a quarter-on-quarter increase of 75% in the second quarter led to a cash flow deficit of 44.6 billion yuan. Its AI labs also incurred a loss of 13.8 billion yuan, and Taobao’s flash sales are not expected to become profitable until 2029.
2. Weak traditional businesses: Revenue from managing core e-commerce customers grew by only 1%, lower than Pinduodou’s 3.5% advertising growth. This indicates a decline in the competitiveness of its main business.
3. Additional share issuance: The issuance of 10 billion dollars in new shares dilutes the rights of existing shareholders, a move highly disliked by the capital market, further impacting Alibaba’s stock price.
IV. Alibaba’s “Comprehensive Layout” Gene: Ambition and Burden
Alibaba’s problems stem from its desire to engage in multiple areas:
- Historical pattern: Ten years ago, it acquired companies in various consumer sectors, including food delivery, supermarkets, and logistics.
- Current strategy: It aims to develop AI cloud services, the Qianwen model, instant retail (Taobao Flash Sales), and a large consumer platform, seeking to integrate shopping and daily life services.
- Consequences: This multi-faceted approach results in heavy spending and a strain on cash flows, necessitating the issuance of additional shares.
This strategy has helped Alibaba seize opportunities in AI cloud, but it also imposes a heavy burden. It’s like trying to compete in five different fields simultaneously; while it may succeed in one, the pressure from the others can slow down its overall progress.
The Future of Alibaba
The duration of Alibaba’s favoritism depends on two factors: whether Alibaba Cloud can continue to grow and convert its investments into profits, and whether its traditional businesses can stabilize. If it fails to achieve these goals, the market’s favoritism may wane quickly, as the capital market always votes with its wallet.