To The Moon

Recently, E-commerce giant Alibaba announced its financial results for the quarter ended December 31, 2022.

Revenue was RMB 247.756 billion, beating the estimate of 245.875 billion from Bloomberg analyst consensus and up 2.1% year-over-year; what’s more, net income was 45.746 billion,which is up 138% year-over-year.

In the US stock market, Alibaba’s shares jumped 7% in the pre-market after the earnings report:

The situation of Baba is similar to Baidu which released earning reports yesterday, featuring slightly better-than-expected revenue , greatly better-than-expected net margin as well as drastically rising pre-market share price. Surprisingly, however, Baidu's share price went up firstly and turned down after the official opening of the U.S. stock market, eventually bucking the trend by 2.6%.

Will Alibaba follow in Baidu's moves?

Specifically, Alibaba’s third-quarter revenue of 247.756 billion exceeded market expectations, while the range was only 0.77%, which could not support a 7% jump in the stock price:

In terms of sectors, China commercial reported revenue of 169.986 billion in Q3, down 1% year-on-year; international commercial reported revenue of 19.465 billion, up 18% year-on-year; local life services reported revenue of 13.164 billion, up 6% year-on-year; Cainiao Express reported revenue of 16.553, up 27% year-on-year; cloud business reported revenue of 20.179 billion, up 3% year-on-year; digital media & entertainment reported revenue of 7.586 billion; Innovation business and others reported revenue of 823 million, down 20% year-on-year.

As the sectors of China commerce, customer management revenue declined 9% year-over-year, primarily due to shrinkage of consumer’s demand, continued competition, and supply chain and logistics disruptions for the surge in the number of new cases of Covid-19 in China, leading to a mid-single-digit decline in online physical goods GMV (excluding unpaid orders) for Taobao and Tmall year-over-year. 

The direct and other revenue from China retail commercial was RMB74,421 million, up 10% year-over-year, which is mainly contributed by revenue growth from the direct businesses of Hema and Ali Health. Among them, Hema recorded double-digit same-store sales growth due to improved delivery and operational efficiency; while Ali Health grew rapidly mainly due to a large increase in medical and healthcare demand brought about Covid-19.

Apparently, the repaid growth of Ali Health depends on certain time in Coivd-19 and may be unsustainable. However, Taobao and Tmall GMV, the core business in Alibaba, recorded a decline of about 5%, partly affected by Covid-19; the intensification of competition deserves the attention of investors, especially Jingdong announced that it will provide 10 billion subsidies in early March, which may cause largest effects on Pinduoduo while Alibaba can not be alone in this e-commerce price war.

International commercial growth of 18% year-over-year was mainly driven by Trendyol, which benefited from strong year-over-year order growth and subsidy efficiency improvements.

Local life grew 6% year-over-year in Q3, especially Ele recording positive GMV growth due to higher average order valueas the boosted demand for groceries and medications with easing policies of Covid-19, resulting in strong growth in non-restaurant orders with higher order values and driving up Ele overall average order value.

As a result, the sustainability of Ele’s growth is doubtful. However, Gaode Map and Flying Pig are expected to drive local life revenue growth.

Ciaonian Express grew 27% in Q3, which is the fastest growing business in Alibaba, primarily due to increased revenue from local consumer logistics services as a result of upgrading the service model to better serve customers and thereby enhance the customer experience since the end of 2021, and increased revenue from international logistics fulfillment solutions services.

Cloud business, which includes AliCloud and Ding Talk, grew nearly 3% year-over-year, impacted by the slowdown in Internet industry revenue.

Digital media and entertainment declined 4% year-over-year, primarily due to lower revenue from Ali Pictures.

From the segment revenue in Q3, although Cainiao is growing rapidly, the business model of the logistics industry is far inferior to that of e-commerce despite repaid growth,which is difficult to drive the giant ship of Alibaba.

In local life services, Ele is surpassed by the Meituan continuously; Gaode map and flying pig will benefit from the recovery of consumption, which is worth looking forward to.

Digital media and entertainment, mainly Youku, has a weaker and weaker presence in the competition with Iqiyi and Tencent Video, and is almost powerless to fight back.

Considering the domestic e-commerce price wars approaching, Alibaba's various businesses lacks emotional expenses; cost reduction and efficiency improvement the is only thing that can excites investors. 

In Q3, Alibaba's net income reached 45.746 billion, a 138% jump year-on-year, but mainly due to a reduction in goodwill impairment losses and cost reductions and efficiency gains.

As shown in the chart below, product development expenses and selling expenses both declined significantly:

The surging profits, caused by a reduction in goodwill impairment losses and cost reductions and efficiency gains, is the false image and has low sustainability.

Fortunately, Alibaba's current valuation is low enough, with a price-to-sales ratio of 2x, which is at a historical low. Since Alibaba has not provided revenue guidance for the next quarter, according to Bloomberg analysts' forecasts for the future, 5.5% year-over-year growth is expected in Q4 and 14.3% in Q1 FY24. It is clear that Alibaba is expected to resume growth afteropening from Covid-19 policies.

Will capital markets boost Alibaba's valuation? High growth is gone anyway.

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