Summary of Key Points
This article takes Alibaba as a case study to analyze the current valuation discount faced by Chinese internet companies, particularly those listed in the US (such as Alibaba). Although Alibaba has a solid e-commerce foundation, a growing instant retail business, and a rare full-stack AI capability, its overall valuation is suppressed due to intensified competition in existing businesses, unprofitable new ventures, and the lack of a viable commercial model for its AI initiatives. The article concludes that splitting different businesses (such as listing Alibaba Cloud and its AI division separately) and allowing each asset to be valued based on its own industry logic would be the fastest way to overcome this valuation discount.
Detailed Analysis
1. E-commerce Foundation Remains Solid, but the Market Growth Potential is Limited
Alibaba’s e-commerce business is stable, with growth rates in the past two years not lagging behind the industry average. However, there are two main issues:
- Slow Industry Growth and Increased Competition: The overall e-commerce sector is growing at a slower pace (from 12% to an estimated 8% in 2026), and leading players like Pinduoduo, ByteDance, and JD.com dominate the market, accounting for 93% of sales. This means it’s becoming increasingly difficult to gain more profits by expanding the market.
- Capital Disinterest in Traditional E-commerce: With the rise of AI, funds are shifting towards this field, perceiving e-commerce as a mature and less innovative sector. For example, JD.com’s valuation multiple in 2027 is only 6.9 times, which reflects the lower interest from investors in traditional e-commerce companies.
In summary, while Alibaba remains a leader in e-commerce, the industry's growth potential is limited, and competition is fierce, leading to a stagnation in its valuation.
2. Instant Retail (Food Delivery/Flash Shopping) Shows Progress, but with Challenges
Alibaba’s instant retail business (e.g., Ele.me) has seen rapid growth (57% in the first quarter), catching up with Meituan in market share. However, this business faces several challenges:
- Continuous Losses: Each transaction results in a loss (estimated at 1.8 yuan per order in 2027), and subsidies have not been discontinued, slowing profit recovery.
- Limited Impact on Main Business: Instant retail has not significantly boosted the growth of Taobao and Tmall, and e-commerce as a whole lagged behind the industry in the first quarter of this year.
- Low Profit Margins: The global food delivery industry has low margins (e.g., Uber Eats at only 3.3%). Even if instant retail becomes profitable, its contribution to Alibaba’s overall profits would be limited.
Therefore, the market is unlikely to assign a high valuation to a business that continues to lose money and has low profit margins.
3. Strong AI Capabilities, but No Profitable Model Yet
Alibaba is one of the few companies in China with a full-stack AI capability covering large models, cloud computing, and chips. However, its valuation does not reflect this strength:
- Cash Flow Pressure: E-commerce profits are being diluted by competition, instant retail is costly, and billions are invested in AI annually, leaving insufficient funds.
- Lack of Profitable Business Models: The most profitable areas for AI include programming and office efficiency improvements. While Alibaba’s Qianwen large model shows promise in programming, DingTalk’s AI-powered productivity tools have not made significant breakthroughs, and Alipay’s AI efforts have deviated from their core objectives.
Without stable cash flow to support AI investments, the market is reluctant to assign a high valuation to these initiatives.
4. The Solution: Splitting Businesses for Separate Valuations
The article suggests that Alibaba should follow the strategies of companies like General Electric and Western Data, which have split their businesses and listed them separately:
- Alibaba Cloud as a Separate Company: This would allow it to break away from the constraints imposed by its e-commerce valuation and compete directly with market leaders like AWS (Amazon Web Services) and Azure (Microsoft Azure). Currently, Alibaba Cloud’s valuation is only around 20 times, which could increase after a separate listing.
- E-commerce and Instant Retail Remaining within the Group: They could be valued as a combination of mature, cash-generating businesses and growth-oriented initiatives, making the valuation more transparent.
- Reducing Cash Flow Pressure: Each business would raise funds independently, eliminating the need for one to subsidize another. For example, e-commerce profits could be used to support AI development.
Examples like Western Data’s split of its hard drive and flash memory businesses (which led to a 20-fold increase in market value) and General Electric’s post-split recovery demonstrate how this approach can boost asset valuations.
Conclusion
Alibaba’s valuation discount is not due to the quality of its assets but rather because the different businesses are combined in one entity, making it difficult for the market to discern their true values. Splitting the company would be like cutting a knot with a sword—instead of trying to untie it slowly, simply separating the components and letting each be valued based on its own merits would naturally increase its overall valuation. While a market rebound is possible once these issues are addressed, concrete actions are needed for a true reversal. Splitting businesses may prove to be the most effective solution.