Apple (NASDAQ: AAPL) and Alibaba (NYSE: BABA) are both frequently regarded as stable blue-chip investments for long-term investors. Apple’s iPhone has a strong hold over the premium smartphone market, and its additional hardware devices and sticky software services continuously retain its customers. On the other hand, Alibaba dominates as China’s largest e-commerce and cloud company, also owning one of the country’s largest streaming video platforms.
Image source: Apple.
Apple’s Challenges
Apple primarily relies on the iPhone, which contributed 52% of its revenue in fiscal 2023. Its iPhone sales declined by 2% during the year, compounded by plummeting Mac sales in the post-pandemic market and adverse currency headwinds.
As a result, Apple’s revenue decreased by 3%, while its earnings per share (EPS) remained nearly flat. Despite repurchasing $77.6 billion in shares, analysts anticipate tepid demand for its iPhones this year. Although fiscal 2024 is expected to see 4% revenue and 8% earnings growth, these rates may appear modest for a stock trading at 28 times forward earnings.
However, Apple possesses over $162 billion in cash and marketable securities, indicating potential for expansion through investments and acquisitions. Its surpassing a billion paid subscriptions across all its services, almost doubling in three years, further strengthens its customer retention. The launch of the Vision Pro headset this year is poised to diversify its hardware business and gain a foothold in the emerging augmented reality and virtual reality markets.
Despite these promising endeavors, Apple’s lack of discernible near-term catalysts and stretched valuations appear to burden its stock. Yet, Warren Buffett’s steadfast commitment echoes through Berkshire Hathaway’s portfolio, with Apple constituting almost half of it, signifying its potential as a long-term winner.
Alibaba’s Trials
Alibaba faced a tumultuous period. China’s antitrust regulators slapped it with a record fine of $2.8 billion, mandating it to terminate exclusive deals with merchants, ease off aggressive promotions, and seek government approvals for future acquisitions. These restrictions weakened Alibaba’s defenses against JD.com, PDD Holdings, and other formidable e-commerce rivals.
Furthermore, China’s macro headwinds and stringent COVID-19 lockdowns throughout 2021 and 2022 compounded the economic slowdown. Additionally, the overall macro headwinds hampered the growth of its cloud business as companies curbed their software spending. Consequently, Alibaba’s revenue only rose by 2% in fiscal 2023 while its adjusted earnings per ADS grew by 4%.
Despite forecasts of 11% revenue and 22% adjusted earnings growth in fiscal 2024 alongside China’s stabilized macro environment, Alibaba’s challenges loom large. The recent departure of its longstanding CEO, convoluted restructuring plans, and fierce competition from PDD in China suggest that its peak growth days are behind it. Yet, Alibaba’s monumental $15.7 billion repurchase of ADR shares throughout fiscal 2023 and the first half of fiscal 2024, combined with a low forward P/E multiple of 8, may offer some support for its stock.
The Best Bet: Apple
While Alibaba seems inexpensive relative to its growth prospects, the future remains uncertain and delisting threats for U.S.-listed Chinese stocks could impair its valuations. The tightening constraints on AI chip sales to China might also disrupt the expansion of its cloud infrastructure platform.
Apple’s stock may currently be out of favor in this challenging market, but its steady growth, expansive ecosystem, and substantial cash reserves arguably make it a more appealing investment compared to Alibaba. The latter still grapples with formidable macro, competitive, and regulatory obstacles before being deemed an undervalued growth stock once more.
Author holds positions in Apple. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.