To The Moon

• Alibaba( $Alibaba(BABA)$ ) has risen 9% since Thursday’s earnings call, but the stock price increase is not primarily due to the earnings beat. Instead, it is mainly because 'Big Short' investor Michael Burry significantly increased his stake in Alibaba.

• Alibaba (BABA) closed 3.2% higher at USD 88.54 on Friday. It is still trading 71% lower than its all-time high of USD 317.14.

4Q2024 Earnings Review

• The quarterly results were mixed, as revenue beat expectations, but earnings per ADS missed.

Revenue: 221.9 billion yuan versus 219.66 billion yuan expected.

Earnings per ADS: 10.14 yuan ($1.40) versus 10.27 yuan ($1.42) expected.

•  Alibaba's revenue grew 6.57% year-over-year, while EBITA operating income declined by 4.1% and 3.12% year-over-year.

• The operating margins were 6.65%, 8.65%, 14.94%, 18.15%, and 7.32% in 4Q2024, 3Q2024, 2Q2024, 1Q2024, and 4Q2023, respectively.

• Overall, the revenue growth and profit margins are not what one would expect from a technology stock.

All eyes are on e-commerce and cloud computing as CEO Eddie Wu has previously asked investors to focus on these two segments in earnings calls.

Source: Alibaba Earnings Slides

Taobao and Tmall Group:

• China e-commerce revenue, accounting for 42% of total revenue, grew 4% year-over-year in the latest quarter.

• Meanwhile, International Digital Commerce and Cainiao, which together account for 23% of total revenue, grew by 45% and 30% year-over-year, respectively. However, these segments are still too small to significantly impact overall revenue growth.

• I reckon Alibaba's China e-commerce revenue and profitability may remain compressed due to the uneven recovery of domestic consumption and intense competition from Kuaishou, Tencent, PDD, JD.com, and TikTok.

   

Source: Alibaba Earnings Slides

Cloud Intelligence Group

• Alibaba's cloud unit, which accounts for 10.6% of total revenue, continues to show lackluster year-over-year revenue growth at merely 3%.

• Excluding cloud revenue from subsidiaries, the cloud unit's revenue would have experienced slightly negative year-over-year growth.

• In contrast, other international cloud players are growing faster than Alicloud. Amazon AWS, Google Cloud, and Microsoft Azure grew 17%, 28.44%, and 31% year-over-year, respectively, during the same quarter.

• The silver lining is Alibaba expects its cloud revenue to return to double-digit growth in the second half of the 2025 fiscal year.

International Digital Commerce Group

• International commerce revenue increased 46% year-over-year, while EBITA decreased by 63%.

• This marks the fourth consecutive quarter that Alibaba( $Alibaba(09988)$ ) has reported more than 40% quarterly revenue growth.

• However, the EBITA loss has also increased from -3.1 billion yuan to -4.1 billion yuan. While betting on the overseas e-commerce unit amid sluggish growth in China may be the right move, it is also testing investors' patience as it remains a cash-burning unit.

Source: Alibaba earnings slides

Free Cash Flow

• The 52% drop in FCF was primarily due to a special dividend of RMB 10,519 million from Ant Group in the same quarter of 2023.

• However, even excluding the RMB 10 billion special dividend, FCF would still have declined by 19% year-over-year.

• This drop in FCF is concerning as it indicates a decrease in cash flow from operating activities due to decreased operating efficiency.

Alibaba is trading like Intel nowadays:

• There are always a bunch of value investors trying to persuade you how cheap Alibaba is.

• Both companies have transitioned from being growth stocks to value stocks.

• They try to divert investor attention to share buybacks and dividends, yet frequently disappoint on earnings.

• Share prices have been volatile, sometimes offering good short-term upside, but trending lower in the longer term.

 Conclusion:

• The 12-month Bloomberg consensus target price is USD104.85, representing an upside potential of 18.4% relative to Friday's closing price of USD88.54.

• The PE ratio is still inexpensive at 12.09x compared to the 3-year average of 15.88x.

• However, we believe that Alibaba has lost its competitive advantage since China's government banned Alibaba's 'choose one from two' practice. The company has struggled to rebuild its company moats.

• Given its still-cheap valuations, the more favorable policy backdrop this year, and investors' renewed patience due to Alibaba's strategic pivot under new leadership, it wouldn't be surprising to see Alibaba stage a technical rally towards technical resistance levels at USD126, USD144, or USD166.

• However, I believe the risk-to-reward ratio may not be worthwhile, and hence I maintain my neutral stance on Alibaba.

• I still prefer other Chinese platform companies like Tencent, Meituan, and Pinduoduo, which I believe have stronger long-term growth catalysts.

• Alibaba may be more suitable for short-term trading rather than long-term investing.

• You may also find my previous coverage on Alibaba here. 

Source: Tiger PC App