Alibaba Fiscal Q1 Earnings: Strong Comeback, But Early Days

Seeking Alpha2023-08-10

SummaryAlibaba Group Holding Limited's Q1 results show significant improvements in key metrics, beating expectations for EPS and revenue.The company's operational efficiencies and cost reductions ...

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2023-08-10
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The stock is up nearly 5% pre-market, although reversals are not uncommon after earnings. Coming in at a time when political tensions and investment restrictions seem to be making the headlines every other day, this earnings report and the resulting price action will be interesting to analyze and follow.Before we get into too many words, the picture shown below is worth a billion words. Or billions of dollars in this case. Baba's June quarter showed massive YoY improvements in almost all important metrics. But does that mean we all need to jump into the stock? Let's take a look Alibaba's version of \"The Good, The Bad, and The Ugly.\"BABA June QtrBABA June Qtr (data.alibabagroup.com)The GoodNon-GAAP EPS of $2.40 beat expectations by nearly 20% while bettering FY 2022's number in the same quarter ($1.74/share) by 38%. To confirm this wasn't just an engineered beat, Alibaba also beat on revenue ($32.29 billion), bettering expectations by 3.50% and YoY by 14%. This also extends Alibaba's EPS beat streak to 7 consecutive quarters while breaking a string of three consecutive revenue misses. So, things look good on surface so far.When a company's EPS beat strongly outperforms the revenue beat, it usually means operational efficiencies saved the day. This is confirmed by the fact that total cost and expenses reduced 6% YoY at a time when most companies globally are facing inflationary challenges.Every single one of the 6 business divisions (listed below) showed growth in their key metrics, which was revenue for most of the groups but subscription revenue and daily active users for the others. Most importantly, the digital commerce division showed a 25% jump in revenue YoY.Alibaba also announced it spent about $3 billion during the quarter to reduce its share count by about 2% to 2.5 billion ADS. The company still has $16.3 billion to use towards buybacks till March 2025, which represents nearly 7% of the company's market-cap as of now. At the least, I expect the buyback to nullify the dilution created by share-based compensation.BABA Shares CountBABA June Qtr (BABA Shares Count (YCharts.com))Alibaba's stock had just broken above its 100-Day and 200-Day moving averages ahead of the earnings report. The fact that the stock remains relative underbought based on a Relative Strength Index (\"RSI\") of 51 makes me believe the set-up is perfect here for a nice run-up post-earnings, unless the overall market weakens.BABA Moving AvgBABA Moving Avg (Barchart.com)The Bad and The UglyThe slight revenue beat came primarily on the strength of the 618 shopping festival, which is China's second-largest shopping event. Clearly, this is a concern heading into the next quarter and beyond as e-commerce company needs a strong consumer.To keep expectations in line, let's not forget that while most of the YoY numbers look much stronger, 2022 still saw major COVID related restrictions in China. So, it looks unlikely that the same improvements will be shown on an on-going basis.You may be aware that Alibaba now has divided its business into 6 divisions as shown below. Cloud Intelligence Group, which was and is still expected to be the next growth driver after e-commerce, showed the lowest revenue growth at 4%.BABA 6 DivisionsBABA 6 Divisions (data.alibabagroup.com)The words \"share-based compensation\" appears 35 times in the earnings report. A lot of it had to do with reversing previous share-based compensation expense, but given how popular this form of compensation is among technology companies and how Alibaba (in my view) is still in its early innings as a company, I expect most of the buyback dollars to merely offset dilution as the company attracts talent using its stock.ConclusionAt a forward multiple of 11, Alibaba Group Holding Limited stock remains fundamentally attractive even though the expected earnings growth is surprisingly anemic. However, there are risks you need to be aware of including but not limited to political tensions, trade restrictions, and China's own economic worries, including the most important factor - sluggish consumer spending.I like the improvements shown in the earnings report, but we must be mindful that for Alibaba to rediscover its mojo, an economic recovery is the most crucial element. And a Chinese economic recovery is likely to be full of bumps and policy surprises due to size of the economy and the weakening investments. For example, property investment has long been a core strength in the Chinese economy, and this fell nearly 8% in the first 6 months of the year.In short, while I believe the stock is a \"Buy\" on its own fundamentals, I believe the macro factors are way too powerful (as headwinds) for the near future. I suggest buying Alibaba stock, but in step-ladder fashion using meaningful pullbacks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":207475979423920,"gmtCreate":1691682131612,"gmtModify":1691682137730,"author":{"id":"4115290449563752","authorId":"4115290449563752","name":"Longs","avatar":"https://community-static.tradeup.com/news/824b5073731ab909a8d4e129caa8d995","vip":1,"crmLevel":6,"crmLevelSwitch":0,"idStr":"4115290449563752","authorIdStr":"4115290449563752"},"htmlText":"👌🏼🙏🏼","listText":"👌🏼🙏🏼","text":"👌🏼🙏🏼","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":10,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/207475979423920","repostId":1196513550,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":46,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1196513550"}