$BABA Q4 was fine. Company still in clean-up / re-invigoration mode, seeing some macro green shoots, and expects growth + profits to re-accelerate in second half of this year.
Story seems to be improving, and numbers may move higher [though hard to predict given fast-changing nature of Chinese business].
Valuation kind of laughable at 3.8x EV / TTM FCF and 5.3x EV / TTM FCF if assume equity investments are worth 50% of book value).
Even w/ the modest recent rally, Chinese stocks are the cheapest they have ever been.
So bear case is war followed by delisting -> 0. Bull case is no war and eventual re-rating which is probably 3-5x return minimally.
Q4 rev of 30.7b USD grew 7% yy while EBITA of 3.3b shrank -5% yy (11% margin) due to investments in e-comm and retention incentives to Cainiao employees.
2024 rev of 130.4b USD grew 8% yy while EBITA of 22.9b grew 12% yy (18% margin). FCF of 21.6b was healthy (down 9% yy but entirely due to ANT special dividend received in prior year – would have increased by a bit but for additional working capital headwinds and stepped up investment in cloud infrastructure).
Highlights
-E-comm – Revs grew 5% w/ profits down 1%. Focused on bringing on low-cost manufacturers to stem market share losses to e-comm upstarts (Douyin and PDD). Have seen dd yy increase in merchants which is driving dd growth in GMV. Want to see this continue and will ramp monetization in 2H.
-Cloud – Revs grew 3% w/ profits up 45%. Focused on continuing to shed low-margin business (headwind done in a few qtrs.) and ramp AI cloud business. Believe have leading AI model that rivals intl peers, and open-source nature brings Chinese developers to their cloud platform.
-Intl E-comm – Rev grew 45% driven by cross border and burn nearly doubled as investing aggressively. Believe these markets early and focused on growing while improving unit economics from here.
-Logistics – Grew 30%. Pulled IPO bc now view business as integral to conglomerate; gave everyone bonuses to compensate for this which increased burn in the qtr.
-All else – Flattish rev growth but burn increased due to macro weakness in brick / mortar
Notes
Strategy
-Put users first: invest in price competitive product supplies, customer service, membership program benefits
-Saw dd growth in online GMV and order growth
-88VIP members increased by dd yy to 35m
-Primary focus is to increase merchandise assortment by bringing in low-cost merchants to drive GMV growth. Then will increase monetization naturally.
Macro
-Chinese consumer has very high cash balance – just about confidence from here
-Seeing some green shoots in discretionary like apparel and electronics
-Local governments relaxing property purchase restrictions
E-comm
-Rev of 12.9b grew 4% yy w/ commission rev growing 5% yy. Profits down 1% as investing in user experience (more video and lower take rates) but saw increased buyer frequency / retention
-Take-rate declined as Taobao mix increases, and current promotional pricing to bring on more merchants w/ cheap stuff
-Expect GMV growth to gradually return to healthy growth as shopping experience improves, and launch monetization products in 2H.
-Making it easier for SMEs to advertise but will take 12 months because tweaking algos to make sure customers get good ROI
-Still seeing healthy growth in April / May
Cloud
-Rev of 3.5b grew 3% yy. Profits up 45% as removed low-margin project revenue.
-Reducing low-margin, project-based revs – still more to go
-True cloud saw dd yy growth; AI related rev saw accelerated growth to triple digit yy
-Rev was generated from foundational model companies, Internet companies and industries such as fin svc and auto
-Actively investing across business – especially in AI infra
-Have strategic partnerships w/ vast majority of foundational models in China.
-Own model, Tongyi, released 110b parameter model in late April that is on par w/ top open source models globally – believe this open-source model is best in China which makes BABA cloud a natural choice for developers.
-General goal is to work towards AGI – covering everything from voice and audio to image, video and text.
-Confident Cloud will return to dd yy growth in 2H25 – believe drag from project-based rev will slow in 1-2 qtrs
International E-comm.
-Rev of 3.8b grew 45% yy driven by cross-border – increased investment here. Burn nearly doubled yy as investing in AliExpress Choice.
-Increase in losses due to increased seasonal investment in customer acquisition in Middle East bc of Ramadan, and then AE Choice business model transition.
-AE Choice margin gap to be filled – will take a few qtrs. but be clear.
-AliExpress delivering robust growth driven by Choice – transitioning from original platform business to supply chain efficiency platform. Choice orders now 70% of total.
-Orders up 20% yy
-17k businesses subscribed to AI business helper and millions of products have been launched w/ AI
-Searches for AI optimized products up 37% yy [not sure what this means]
-Intend to improve unit economics from here
Logistics (Cainiao)
-Rev of 3.4b grew 30% yy driven by cross-border fulfillment supporting AliExpress. Burn increased due to stock grants as result of pulling IPO.
-Withdrew HK IPO bc Cainiao provides critical infra to international e-comm segment, so decided not to IPO it.
-Extended 5-10 day delivery to 14 total countries
Local Services
-Rev of 685m down -1% yy due to Youkou decline. Burn improved by 25% due to reduced losses at Youku.
All Other
-Rev of 7.1b down -3% yy due to softness in SunArt (brick and mortar retail). Burn increased by 50%.
Capital
-Bought back 12.5b USD in FY24 and paid 4.0b div
-Bought back 4.8b USD in Q4 – both in ADS and ADR
-20m ADS so 2.5m ADR
-71b cash, 66b in equity investments, 23b debt -> 114b net cash. @$78is 195b cap and 81b EV.
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