Tag: Alibaba Group Holding Limited (BABA)

Time to Sell or Buy the Dip? Assessing Alibaba’s Price Action Amid Headwinds

Posted on by The INO.com Team

Commanding a market of roughly $174.86 billion, China’s leading technology giant Alibaba Group Holding Limited (BABA) has faced major headwinds over the past three years, with its shares taking a nosedive of more than 70%. Currently trading below $77, the stock has fallen from its 2020 high of more than $300.

But What Could Have Possibly Caused This Downfall?

Over the past few years, BABA has navigated through a series of obstacles that have significantly hampered its growth trajectory.

In 2021, amid China's sweeping efforts to rein in technology companies, BABA incurred a substantial fine of approximately $2.80 billion, equivalent to roughly 4% of the company's 2019 revenue. This penalty was imposed by Chinese regulators who accused BABA of exploiting its market dominance.

Apart from heightened scrutiny from Chinese regulators, 2023 proved to be a challenging year for BABA, raising uncertainties about the future of the tech giant, particularly as the era of Artificial Intelligence (AI) unfolded.

Last year, the company's strategic plan to list its cloud unit as a separate entity was compelled to undergo reconsideration due to the escalating chip conflict between the U.S. and China.

As the U.S. government intensified restrictions on exporting advanced chips crucial for powering AI models to China, BABA expressed concerns that this could have a substantial negative impact on the operational capabilities of its Cloud Intelligence Group and have a further negative on the company’s profitability.

Additionally, the company recognized that these restrictions could have wider ramifications, potentially hindering their capacity to advance technological capabilities across their various business sectors. These concerns did not sit well with investors, leading to a nearly $20 billion loss in the company's market cap last year.

Furthermore, BABA’s co-founder Joe Tsai recently, during an exchange with Nicolai Tangen, CEO of Norway’s Norges Bank Investment Management, indicated that China is at least two years behind American companies like Open AI, which have emerged as frontrunners in AI.

Tsai suggested that many Chinese tech companies were facing chip shortages, which he described as a significant challenge. However, he pointed out this issue was widely addressed within the industry.

Tsai further highlighted the challenges of conducting business in the U.S., emphasizing the need for caution as a Chinese company. He noted BABA’s limited consumer-facing presence in the U.S., citing concerns about data privacy and cybersecurity.

On top of it, as a retaliatory measure against U.S. restrictions, the Chinese government has directed the country's largest telecom carrier to replace foreign processors with domestic alternatives in its networks by 2027.

This measure is anticipated to hurt a few renowned U.S. chip giants who supplied core processors for network equipment in China. With China aiming to decrease its reliance on U.S. chips, tech companies like BABA are poised to face significant challenges.

Bottom Line

BABA’s fiscal 2024 third-quarter performance painted a mixed picture. Although the topline experienced a modest growth of just 5% year-over-year, reaching $36.67 billion, the company’s non-GAAP net income and non-GAAP EPS declined by 4% and 2% year-over-year to $6.75 billion and $0.33, respectively.

Furthermore, Alibaba’s Taobao and Tmall Group and Cloud Intelligence Group brought in revenue of $18.18 billion and $3.95 billion, witnessing only 3% and 2% year-over-year increases, respectively. The company’s newly appointed CEO, Eddie Wu, emphasized BABA’s focus on driving growth in e-commerce and cloud services.

Wu highlighted that the top priority is to reignite the growth of the core businesses, including Taobao and Tmall Group, through increased investment to enhance user experiences and strengthen market leadership over the next year.

Looking ahead, Wall Street analysts appear optimistic regarding the company's performance for fiscal year 2023, forecasting a 5.5% year-over-year growth in revenue and a 9.4% year-over-year growth in earnings per share.

However, despite the bullish estimates, it is crucial to acknowledge BABA and its peer companies are confronting a complex landscape of regulatory, geopolitical, and technological challenges, signaling a period of significant uncertainty and potential turbulence for the industry in the years ahead.

To make matters worse, weak consumer demand in China isn’t supporting its case either. According to the data released by the National Bureau of Statistics (NBS), China’s consumer inflation cooled more than anticipated in March, alongside persistent producer price deflation, which continues to pressure policymakers to consider further stimulus measures due to weak demand.

Considering BABA’s limited global consumer-facing presence and its Taobao and Tmall Group, which is highly dependent on Chinese consumer spending, the challenging economic environment could pose significant hurdles for the company in the near term.

Overall, despite BABA’s commitment and focus to fuel growth in e-commerce and cloud services, as highlighted by CEO Wu, the company’s growth might be hindered by ongoing macroeconomic headwinds such as weak consumer demand in China, geopolitical tensions, and technological constraints.

To that end, it seems prudent for investors to closely monitor the stock and wait for further developments.

How Alibaba's 3% Reduction in Outstanding Shares Affects the Stock's Future

Posted on by The INO.com Team

During the 12 months ended December 31, 2023, Alibaba Group Holding Limited (BABA) repurchased a total of 897.9 million ordinary shares for $9.5 billion. This includes the purchase of 292.7 million ordinary shares for a total of $2.9 billion during the fourth quarter.

The shares were purchased in both the U.S. and Hong Kong markets under its share repurchase program, the company said in a filing.

The Chinese e-commerce giant said that it had 20 billion ordinary shares outstanding as of December 31, 2023, compared to 20.7 billion ordinary shares from December 31, 2022. This indicates a net reduction of 3.3% in its outstanding shares.

The remaining amount that the company’s Board had authorized for its share repurchase program, which is effective through March 2025, was $11.7 billion as of December 31, 2023.

When a company buys back its own shares from the marketplace, it reduces the total number of shares outstanding. As a result, the value of the remaining shares increases. The company’s Board may feel that its shares are undervalued, making it a favorable time to purchase them. Meanwhile, investors often perceive a buyback as an expression of confidence by the management.

Therefore, in the case of Alibaba, a more than 3% reduction in outstanding shares will positively impact its shareholder value and give a significant boost to the stock’s performance this year.

Now, let’s review several other factors that could influence BABA’s performance in the near term:

Strategic Reorganization

Last year in March, BABA announced plans to split its business into six independent units in a strategic move to unlock shareholder value and advance competitiveness.

“This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes,” said Daniel Zhang, former CEO and chairman of Alibaba Group.

Under the restructuring, Alibaba will be split up into six newly formed business units: Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, International Digital Commerce Group, and Digital Media and Entertainment Group.

Each business unit will be overseen by its own chief executive and board of directors. Five of the new business clusters “will also have the flexibility to raise outside capital and potentially to seek its own IPO,” the company said.

As per the latest update on business group spin-offs and capital raisings, the recent expansion of U.S. restrictions on the export of advanced computing chips has created uncertainties for the Cloud Intelligence Group’s prospects.

The company believes that a complete spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement. Correspondingly, it decided not to proceed with a full spin-off and instead will focus on developing a sustainable growth model for Cloud Intelligence Group under fluid circumstances.

In terms of Alibaba International Digital Commerce Group, it is in preparation for external fundraising. Further, Cainiao Smart Logistics Network Limited applied for an initial public offering in Hong Kong and submitted its AI filing to the Hong Kong Stock Exchange.

Capitalizing on the AI Boom

BABA’s newly appointed CEO, Eddie Wu, stressed putting AI and user experience at the top of the company’s priorities to reclaim customers and market share in an immensely competitive arena.

“Over the next decade, the most significant change agent will be the disruptions brought about by AI across all sectors,” Wu said in his note, reviewed by Bloomberg News. “If we don’t keep up with the changes of the AI era, we will be displaced.”

Wu added that Alibaba will reinforce strategic investments in the areas of AI-driven tech businesses, internet platforms, and its global commerce network.

On January 9, 2024, Alibaba.com, a leading platform for global B2B e-commerce and part of Alibaba International Digital Commerce Group, introduced its latest Smart Assistant features powered by AI at CES in Las Vegas, NV.

The Smart Assistant is an AI-powered sourcing tool that caters to newcomers and seasoned entrepreneurs in the dynamic world of global commerce, helping them discover new opportunities, stay up-to-date on trends, seamlessly track orders and more in a single, efficient touchpoint.

Also, in October 2023, Alibaba launched an upgraded version of its AI model as the Chinese tech giant looks to challenge its U.S. rivals, including Amazon.com, Inc. (AMZN) and Microsoft Corporation (MSFT).

BABA launched Tongyi Qianwen 2.0, its latest large language model (LLM). Tongyi Qianwen 2.0 “demonstrates remarkable capabilities in understanding complex instructions, copywriting, reasoning, memorizing, and preventing hallucinations,” the company said. 

Alibaba stated that Tongyi Qianwen 2.0 is a “substantial upgrade from its predecessor,” which was introduced in April. Also, the Hangzhou-based company announced the GenAI Service Platform, which allows companies to build their own generative AI applications using their own data.  

Solid Last Reported Financials

For the fiscal 2024 second quarter that ended September 30, 2023, BABA reported revenue of $31.04 billion, an increase of 8.5% year-over-year. The revenue slightly surpassed analysts’ estimate of $30.84 billion. Alibaba International Digital Commerce Group rose 53% year-over-year, while Cainiao Smart Logistics Network Limited and Local Services Group grew 25% and 16%, respectively.

Alibaba’s income from operations increased 33.6% from the year-ago value to $4.60 billion. The company’s adjusted EBITDA came in at $6.75 billion, up 13.7% from the prior year’s quarter. Also, its adjusted EBITA rose 18% year-over-year to $5.87 billion, primarily contributed by revenue growth and improved operating efficiency.

Furthermore, the Chinese tech giant’s non-GAAP net income for the quarter came in at $5.51 billion, an increase of 18.8% from the prior year’s period. It posted non-GAAP net income per share of $2.16, compared to the consensus estimate of $2.09, and up 21% year-over-year.

As of September 30, 2023, Alibaba’s cash and cash equivalents, short-term investments and other treasury investments, included in equity securities and other investments on the consolidated balance sheets, were $85.60 billion. During the quarter ended September 30, 2023, cash inflows from operating activities were $6.75 billion, up 4% from the same quarter of 2022.

Also, the company’s free cash flow was $6.20 billion, an increase of 27% year-over-year.

Impressive Historical Growth

Over the past five years, BABA’s revenue and EBITDA grew at CAGRs of 24.1% and 15.5%, respectively. The company’s net income and EPS rose at respective CAGRs of 17% and 17.3% over the same timeframe. Its levered free cash flow improved at 8.2% CAGR over the same period.

Moreover, the company’s tangible book value and total assets increased at CAGRs of 34.2% and 17% over the same timeframe, respectively.

Favorable Analyst Estimates

Analysts expect BABA’s revenue for the fiscal year (ending March 2024) to grow 8% year-over-year to $133.38 billion. The consensus EPS estimate of $9.20 for the ongoing year indicates an 18.6% year-over-year increase. Moreover, Alibaba has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2025, the company’s revenue and EPS are expected to increase 8.9% and 7.8% from the previous year to $145.27 billion and $9.92, respectively.

Low Valuation

In terms of forward non-GAAP P/E, BABA is currently trading at 7.83x, 50.1% lower than the industry average of 15.68x. The stock’s forward EV/Sales of 1.11x is 10.7% lower than the industry average of 1.24x. Likewise, its forward EV/EBITDA of 5.17x is 48.2% lower than the industry average of 9.99x.

In addition, the stock’s forward Price/Book multiple of 1.18 is 53.8% lower than the industry average of 2.55. Also, its forward Price/Cash Flow of 7.20x is 27.2% lower than the industry average of 9.88x.

Robust Profitability

BABA’s trailing-12-month EBIT margin of 14.66% is 92.9% higher than the 7.60% industry average. Moreover, the stock’s trailing-12-month levered FCF margin and net income margin of 14.17% and 56.87% are considerably higher than the industry averages of 5.37% and 4.52%, respectively.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 13.35%, 6.34% and 7.32% favorably compared to the respective industry averages of 11.40%, 6.05%, and 4%. Also, its trailing-12-month gross profit margin of 37.73% is 6.6% higher than the industry average of 35.38%.

Stock Upgrades

On November 24, 2023, Goldman Sachs analyst Ronald Keung maintained a Buy rating on BABA shares, with a price target of $134, suggesting that shares are anticipated to surge by nearly 73% over the coming year. The analyst stated that its FCF generation will fund ongoing buybacks and dividends. Also, he continues to view the stock’s valuation as attractive.

Bottom Line

BABA beat second-quarter analyst expectations for earnings and revenue. Revenue grew approximately 9% year-over-year in the last reported quarter, and the company posted expanded margins as its income from operations rose an impressive 24%. Also, the stock’s valuation is extremely attractive.

Alibaba further pleased its investors with last year’s announcement of plans to split its business into six separate units in a move to unlock more shareholder value and foster competitiveness. Also, the company continues to leverage AI across its operations. Its AI-powered systems optimize its pricing, marketing, and logistics, ultimately resulting in enhanced user experience.

As per Statista, the AI market in China is projected to reach a staggering $38.89 billion in 2024. In global comparison, the largest market will be in the U.S. ($106.50 billion this year). China’s AI market is further expected to show a CAGR of 18%, resulting in a market volume of $104.70 billion by 2030.

Alibaba’s AI leadership positions it to capitalize on the significant growth potential of the Chinese AI market. Also, the company has introduced its upgraded AI model to compete with its U.S. rivals, such as AMZN and MSFT.

“Through a more flexible organizational governance mechanism, we aim to capture brand new opportunities from the ongoing AI technological transformation and create more value for our customers,” said CEO Eddie Wu in BABA’s latest earnings release.

Notably, Alibaba’s 3.3% reduction in its outstanding shares because of a share buyback program will further create a greater value for its shareholders. Given BABA’s solid financials, accelerating profitability, attractive valuation, and bright growth prospects, this tech stock appears an ideal buy now.

Beyond Gaming: Assessing the Ripple Effect of China's Regulatory Actions on BABA and JD

Posted on by The INO.com Team

The Chinese authorities have recently issued a comprehensive draft of rules and regulations to reduce online expenditure and in-game rewards in video games. These impending regulations would prohibit online games from offering incentives to players based on their consecutive logins, first-time purchases, or recurring payments – standard practices typically deployed in online gaming scenarios.

The removal of the incentives could reduce daily active users and in-app revenue. Such a change could ultimately compel publishers to restructure their game design and monetization strategies.

The draft represents the most stringent enforcement to date. It bars games from presenting probability-based draws to underage users and disallows the trading of virtual gaming items. Amid ongoing concerns over user data security, it mandates that game publishers host their servers domestically in China.

The aggressive regulations have slammed the world's largest gaming market. The immediate fallout saw investors retreating in haste, resulting in an approximate loss of $80 billion in market value for China’s two dominant gaming companies, Tencent Holdings and Netease.

Several U.S. and European video game developers saw shares take a hit after Friday’s announcement, but the losses were small when compared with Tencent’s 16% tumble and NetEase’s 25% decline. The regulation news wiped about $54 billion off Tencent’s share value.

The country initiated its major clampdown on the gaming sector in 2021, implementing stringent playtime restrictions for minors and freezing new game approvals for almost eight months, citing increasing concerns over gaming addiction. These regulatory measures led to unprecedented challenges for China's gaming industry in 2021 and 2022, marking the first time the industry witnessed a contraction in total revenues.

While the Chinese authorities resumed approval of new games in the following year, regulators have maintained their focus on managing the duration of gameplay for minors and their overall expenditure within the game.

The recent draft comes as China's domestic game market revenue reached ¥303 billion ($42.6 billion), growing 14% in 2023, reversing a 10% decline from the year before, as per figures from industry association CGIGC. Due to the sheer size and impact of Chinese gaming giants, the global video games market could also be affected in the long run.

The profound impact of China's recent regulations has reverberated beyond the gaming industry and has significantly impacted Chinese tech corporations.

A regulatory storm against big tech firms emerged in late 2020 when Chinese authorities began to express concerns about the extensive influence and growth of the nation's major internet platforms.

This regulatory onslaught against China’s tech giants resulted in the wiping of trillions of dollars in market value, leaving a significant dent in one of the most burgeoning sectors of the world's second-largest economy. This intensified the U.S.-China decoupling, with its effects visibly shrinking those Chinese tech companies that once competed neck-to-neck with their U.S. counterparts.

Alibaba Group Holding Limited (BABA) found itself in the eye of the storm following critical comments made by co-founder Jack Ma against Chinese regulators ahead of the impending IPO of its subsidiary Ant Financial. This fintech affiliate, whose IPO plans in Shanghai and Hong Kong were halted abruptly, created a global tremor among the investment community.

BABA faced a record-breaking fine of $2.8 billion, and Chinese antitrust regulators imposed rigorous restrictions on the company's e-commerce operations. The newly enacted measures – barring BABA from implementing exclusive agreements with merchants, employing loss-leader promotions to attract fresh clientele, and boosting its ecosystem through unauthorized investments – have subsequently weakened BABA's safeguards against market competitors.

Following the censure of BABA, China's regulatory hawks turned their attention toward the online financial service units of 13 other tech titans, including JD.com, Inc. (JD).

It was initially predicted that Chinese policymakers would change their trajectory and prioritize growth stimulation in 2023, with tech firms being key players in this strategy. But with recent gaming regulations eroding consumer faith in tech stocks, it is expected to trigger a domino effect, potentially impacting shares of high-flyers like BABA and JD.

Here, we delve deeper into the ramifications and implications faced by these tech companies.

Alibaba Group Holding Limited (BABA)

BABA, previously regarded as China's best contender for becoming a trillion-dollar entity, currently stands near its lowest trading value of the year, a significant reduction from its 2020 peak. The company is navigating through turbulence on multiple fronts. Weakened economic recovery and burgeoning rivals threaten BABA's once primarily dominant position in the online retail sector.

BABA recently aborted plans to float its cloud division due to uncertainties stirred by the United States' export restrictions on advanced computing chips. The tech giant now looks forward to formulating a robust growth model centered around the increasing demand for networked and highly scalable cloud computing services underpinned by AI. However, it's worth noting that U.S. bans on high-end chip exports to China may hinder China's technological ambitions.

In an endeavor to revive profits, BABA is refocusing on e-commerce, leveraging content creators and competitive pricing to remain relevant amid stiff competition. The e-commerce behemoth is looking at slashing prices and is projected to continue heavy investment in curating content encompassing shopping, consumption, and everyday life.

Stricter regulations enforced in recent years have purportedly placed pressure on Chinese tech firms like BABA. This year, BABA has also witnessed a contraction in its workforce. BABA's stock prices dropped following China's announcement to regulate the online gaming industry with tough measures aimed at reducing excessive spending and controlling online game content.

Alibaba Cloud offers custom solutions for the gaming industry, providing dependable support for game development and distribution, ensuring an excellent experience for players and users. Globally, it remains a top choice for gaming businesses intending to streamline their digital transition journey with flexible game development, secure and swift global distribution, and economical operations.

BABA owns several renowned gaming platforms in China, including Youku Games, Epic Games China, and Perfect World. These platforms boast millions of gamers and generate billions of dollars in revenue each year.

Nonetheless, these platforms will also have to conform to new rules that curtail online gaming time for minors and limit game content featuring violence, gambling, or inappropriate language. These newly imposed rules mandate BABA to modify its game development strategy and content to meet the novel standards and evade potential penalties.

Additionally, it might require extensive resources and effort to supervise and moderate its gaming platforms to maintain regulatory compliance, potentially risking the loss of consumers. Such changes could then detrimentally affect BABA's revenue and profitability derived from the online games that the tech behemoth develops and distributes.

However, analysts expect BABA’s revenue for the fiscal third quarter ending December 2023 to increase 4.9% year-over-year to $37.65 billion. Its EPS is expected to come at $2.79 for the same quarter.

JD.com, Inc. (JD)

JD, China’s leading e-commerce platform, has extended its realm of operations to include online gaming under the name of JD Gaming.

What JD is doing in gaming?

The retail giant's gaming venture has several elements to its approach. Firstly, it harnesses the insights of its extensive consumer base, who contribute an abundance of product feedback collected through the platform's transactions. This data is shared with industry partners to inform and enhance their product development.

One key instance is JD's engagement with influential partners like Lenovo, a noted Chinese PC manufacturer, and the gaming behemoth Tencent. The collaboration resulted in the creation of mobile gaming optimized smartphones. Through this strategy, JD not only participates in product development but also acts as a distributor for these devices, directly catering to its gaming clientele via its shopping app.

Secondly, a significant component of JD's gaming strategy involves its stake in e-sports or competitive video gaming. In 2017, JD unveiled its professional e-sports team, JD Gaming, expanding it later by launching JD Esports, a dedicated mobile gaming team, in 2020.

Considering that global esports revenue is projected to surge to $3.8 billion by 2023, the potential for profit is vast. JD intends to ensure that a part of this profitable domain is its.

However, recent changes in gaming regulation affecting youth in China might cause a shift in consumer preferences and gaming habits. Consequently, online games, accompanying accessories, game consoles, and in-game purchases may see a decrease in demand. These developments have the potential to impact JD's e-commerce operation in ways worth close observation.

Analysts expect JD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to decline 1.1% and 3.8% year-over-year to $41.97 billion and $0.66, respectively.

Bottom Line

The sweeping restrictions unveiled before Christmas elicited reminders of the unceremoniously harsh crackdown on the tech sector in 2021. During that year, Chinese regulatory bodies spontaneously initiated limitations spanning various areas from e-commerce to entertainment, effectively destroying the online education industry through the outlawing of profits.

Some believe that there are traces of a governmental aspiration for an enhanced and diverse gaming environment marked by creativity and exceptional quality. The authorities lean toward a marketplace where publishers gain profits via ethical practices and innovative offerings instead of aggressive monetization tactics or endorsing "pay-to-win" games.

In a surprising turn of events, Chinese officialdom has moderated newly formulated online gaming regulations soon after the proposed constraints resulted in major technology firms losing billions of dollars. They sanctioned 105 domestic games, indicating the Chinese authorities' approval for the evolution of online gaming. This could potentially bolster investor sentiment.

However, analysts remain cautious when considering China's e-commerce titans, like BABA and JD. As it stands, the Chinese consumer is progressively tightening discretionary spending amid a frail economic climate. Additionally, the looming threat of intensified sector rivalry might influence company profitability.

Last week saw Chinese stocks taking a downturn, induced by apprehension over a potential surge in COVID-19 contagions, endangering progress in the world's second-most prosperous economy. This puts the decision to open the country post-lockdown under scrutiny, especially considering the resultant economic deceleration witnessed last year.

Given this backdrop, it could be wise to wait for better entry points in the featured stocks

Shopify (SHOP) Unveils HOT AI Chatbot: Is it a 'Must' Buy?

Posted on by The INO.com Team

On July 12, Canada-based e-commerce company Shopify Inc. (SHOP) unveiled its artificial intelligence (AI) assistant designed to help merchants with questions, thereby becoming the latest in the string of companies to implement such a feature.

The assistant, Sidekick, would be embedded as a button on the platform that can complete tasks for merchants and answer specific questions about their business, including queries on sales and order trends within a store. Illustrating the features through a video on Twitter, SHOP CEO said that the AI feature is “coming soon.”

Since the announcement, SHOP’s stock has gained about 6.9%, compared to a 2.9% rise during the month prior, at par with the S&P 500. However, is the feature worth the hype? Let’s find out.

AI is an umbrella term that is used to denote a series of programs and algorithms designed to mimic human intelligence and perform cognitive tasks efficiently with little to no human intervention.
However, unlike other next-big things, AI has been around for quite some time, influencing how we shop, drive, date, entertain ourselves, manage our finances, take care of our health, and much more.

However, the technology came into the limelight late last year with the release of ChatGPT, which in its own description, is “an AI-powered chatbot developed by OpenAI, based on the GPT (Generative Pretrained Transformer) language model. It uses deep learning techniques to generate human-like responses to text inputs in a conversational manner.”

The easily accessible chatbot that took the world by storm is one of the several use cases of generative AI, the subset of algorithms that creates and returns content, such as human-like text, images, and videos, based on the user's written instructions (prompts).

Including this subset, AI in its various forms and applications can analyze large volumes of data generated during the entire course of our increasingly digital existence and identify trends and exceptions to help us develop better insights and make more effective decisions.

Given its massive importance, it’s hardly surprising that Zion Market Research forecasts the global AI industry to grow to $422.37 billion by 2028. Hence, this field has understandably garnered massive attention from investors who are reluctant to miss the bus on such a watershed development in the history of humankind.

The Catch

Notwithstanding all the transformative qualities of AI, investors in SHOP would be wise to be aware of the caveats before FOMO drives them to buy like there’s no tomorrow and inflate a "baby bubble" growing in plain sight.

Microsoft Corporation (MSFT) has bet big on the technology by announcing a multiyear, multibillion-dollar investment deal with Open AI. MSFT’s rival, Alphabet Inc. (GOOGL), is in hot pursuit. With ubiquitous AI-enabled technology across its platforms, the company has unveiled its response to ChatGPT, called BardAI.

Chinese tech giant Baidu, Inc. (BIDU) has also followed suit with Ernie Bot. Amazon.com, Inc. (AMZN) and Meta Platforms, Inc. (META) are also among the notable players in this dynamic domain. Alibaba Group Holding Limited (BABA), Zoom Video Communications, Inc. (ZM), and Databricks have all crowded this space with their own offerings.

Hence, while the technology is powerful (and useful, unlike most cryptocurrencies), the adoption is fast becoming so widespread that it remains unclear how it could help a specific business differentiate itself by developing enduring competitive advantages (read moats) and generating consistent profitability.

While AI is really good (and continually getting better) at predicting based on available data, it lacks contextual understanding. Since, in the words of Morgan Housel, 'things that have never happened before happen all the time,' it could be challenging for any AI tool to deal with tails, exceptions, and outliers in the shifting sands of business, economy, and society.

Even AAPL co-founder Steve Wozniak, who knows more than a thing or two about technology, agrees with the ‘A’ and not the ‘I’ of Artificial Intelligence.

Stick to Basics

Just as we have learned during the dot-com, cryptocurrency, real estate, and numerous other bubbles through the ages, markets can stay irrational longer than investors can stay solvent.

Therefore, even if the next big thing comes along and changes the world (and electricity, automobiles, personal computers, and the Internet really did), it is fundamentals that determine whether a business can survive to capitalize on those windfalls.

With inflation and rising interest rates expected to keep weighing on consumer spending, SHOP’s core activities in a softening market have been facing unrelenting pressure from competition on both livestream shopping and logistics fronts.

However, in a strategic U-turn, SHOP sold its logistics unit, which it had spent years building out, including last-mile delivery startup Deliverr, its largest acquisition ever, to supply chain technology company Flexport. Moreover, on May 4, SHOP announced that it would be laying off 20% of its workforce in addition to the 10% it let go last July.

Bottomline

Rather than getting too carried away and stretching an improvisation that keeps the business at par with the competition to frothy excesses with unrealistic expectations, it would be wise for investors to evaluate SHOP based on its fundamentals and prospects.