Alibaba’s reported a mixed quarterly update overnight, highlighting solid top-line strength but with some bottom-line pain. Revenue beat expectations, driven by a great result in the cloud division and a still-solid domestic e-commerce business, but profitability took a heavy hit as the company pushes to gain market share in China’s brutal instant-delivery war. The stock dipped ~2.5% as they chalked up back-to-back quarters of negative free cash flow, the first since listing in 2014.
Cloud is the clear bright spot. We’ve been waiting for Alibaba’s big AI investments to show up in the numbers, and this quarter delivered.
- Cloud revenue up +34% y/y to RMB 39.8B (vs est. RMB 38B) – biggest surprise of the result
- Momentum improving: growth accelerated vs +26% last quarter
- Strong uptake of Alibaba’s Qwen AI models and refreshed tech stack
- Qwen app surpassed 10m downloads in its first week
Alibaba has poured ~RMB120B in AI capex over the last four quarters, and the early return profile is looking encouraging. Importantly, this is the business the market cares most about.
While Alibaba’s core China retail arm delivered strong revenue growth, profitability was weak as it fights Meituan and others in ultra-fast grocery and food delivery.
- Retail revenue +16% y/y to RMB 132.6B (beat)
- Adj. EBITA down 76% y/y – the big issue
- Subsidies and delivery incentives remain high
- Management says quick commerce is scaling, but the market is not convinced.
Alibaba is going hard into flash-delivery to drive engagement on Taobao, but margins are being hit in the process. The company says the September quarter marks the peak of subsidies, but we’ll need to see how that plays out next quarter to determine the accuracy of the claim. CEO Eddie Wu emphasised rapid user growth and improved unit economics in quick commerce, but the proof is yet to show up.
Overall, we’re seeing accelerating growth in cloud with strong AI adoption, and early signs that years of heavy investment are starting to pay off. For now, the benefits are being offset by its aggressive push into China’s hyper-competitive fast delivery system, which is crimping the stock performance for now, and why BABA’s earnings multiple has risen to 18x even when the stock price remains ~50% below it’s prior peak.
- To remain bullish on Alibaba, we need to believe in their approach which is favouring long-term growth at the expense of near-term earnings. Ultimately, we think this will pay off, though patience is still warranted, and there are certainly more risks around this strategy.
MM remains long & bullish BABA ~$US157
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