Alibaba Earnings Preview: Huge CapEx, Quick Commerce, and Qwen App - How Can the Three Major Cash Burners Be Filled?
$Alibaba(BABA)$
Core Financial Indicators
– The company's revenue is expected to be ￥289.73B for FY2026 Q3, up 3.42% YOY;
– Net income is estimated to be ￥24.17B, down 50.62 YOY.
The reason for this low single-digit revenue growth is that Alibaba has divested its less profitable offline retail businesses in China, Intime Department Store and Sun Art Retail, which were still included in the financial reports of the same period last year. Alibaba has not separately disclosed the revenue scale of them, but referring to previous management statements, the group's actual overall revenue growth is in the low double digits.
Four Things to Watch
1. Quick Delivery/Food Delivery sector loss
In the Chinese e-commerce sector, the main focus is on the reduction of losses in Quick Delivery. Management revealed in the last financial report that since October, the loss per order for quick delivery has halved, while in the previous quarter, the market estimated that the quick delivery war resulted in a loss of about ￥36 billion. The market expects the loss for this quarter to be around ￥20 billion. The observable indicator is selling expenses.
The reasons for the reduced losses are increased average order value, higher non-food order proportion in the order structure, and economies of scale. Moreover, management's profit expectations for Quick Delivery may not be high, as delivery business has helped its main app's daily active users surpass $Pinduoduo Inc.(PDD)$
2. Cloud business revenue
In the previous quarter, Alibaba Cloud's growth rate of over 30% was one of the factors supporting Alibaba's valuation.
Regarding enterprise-level large model calls, according to Frost & Sullivan data, Alibaba's large model had over 30% market share in the enterprise market in the second half of last year, ranking first in the Chinese market. The previous financial report showed that Alibaba Cloud's external demand growth caught up with internal growth, and investors can continue to pay attention to the demand situation this time.
3. Losses related to the consumer-facing Qwen App
Currently, Alibaba's consumer-facing AI products have not established a clear differentiated positioning. After spending billions on subsidies during Chinese Spring Festival, Qwen's DAU reached a second peak of 55.3 million but quickly fell back to the 40 million level, widening the gap with Doubao, the ByteDance's AI product.
Moreover, there has been recent management turmoil in the Qwen business. Lin Junyang, the creator of Qwen from 0 to 1, has resigned. The reason is that the team's assessment has shifted from model technical capabilities to commercial indicators such as DAU, conflicting with the R&D goals of the technical team. Additionally, management plans to split Lin Junyang's vertically integrated team (full-chain R&D) into horizontally divided modules, significantly reducing his management authority.
The company previously guided that the All Others segment would lose about 10 billion, an increase of about 6.6 billion quarter-over-quarter, mostly due to Qwen's user acquisition investments. Other losses include investments in AMap's street view rankings and Quark browser's AI features.
4. Will free cash flow continue to deteriorate?
Alibaba has previously given guidance that its three-year CapEx will reach 380 billion RMB, averaging over 30 billion RMB per quarter. In addition to CapEx for chip purchases, the quick delivery war is still eroding operating cash flow, leading to a significant reduction in the scale of share buybacks in the last quarter.
Option Market Signals
The company's current put/call ratio is 0.67, indicating a weakening of bearish momentum. Its implied volatility is 48.42%, higher than the volatility during the period when the previous financial report was released.
Summary of Risks and Opportunities
– Potential Positive Catalysts: Cloud services acceleration
– Risks to Monitor: China e-commerce competition; CapEx increase
– Valuation:
Alibaba's PE ratio is 18.02 times, which is at the 31th percentile of its historical range over the past five years.
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