Alibaba (HKG: 9988) / (NYSE: BABA) reached a 52-week low of US$58.01 in October 2022 before rebounding to US$124 in January 2023 after China announced its reopening and sentiments improved from the end of the regulatory crack down. The announcement of Jack Ma ceding control of Ant Group was also viewed as a key move aimed at pleasing regulators.
Charlie Munger said it was his worst investing mistake as he overestimated Alibaba’s future earnings potential while Michael Burry of The Big Short recently disclosed that he took a position in Alibaba.
We previously shared five reasons why we thought Alibaba was finally on a bull run. We now review Alibaba’s 3QFY23’s results to understand Alibaba’s latest position and comment whether Munger or Burry will have the last laugh.
Summary financial results
| P&L in RMB’m | Dec’22 | Dec’21 | Sep’22 | YTDFY23 | YTD FY22 | Variance (%) | Variance (%) |
| EPS in RMB’$ | Dec’22 vs Dec’21 | YTD FY23 vs YTD FY22 | |||||
| Revenue | 247,756 | 242,580 | 207,176 | 660,487 | 649,010 | 2 | 2 |
| Income (loss) from operations | 35,061 | 7,068 | 25,137 | 85,111 | 52,921 | 396 | 61 |
| Adjusted EBITDA | 59,162 | 51,364 | 43,311 | 143,587 | 134,832 | 15 | 6 |
| Adjusted EBITDA margin(%) | 24 | 21 | 17 | 22 | 21 | ||
| Earnings per HK share | 2.24 | 1.27 | (0.97) | 2.31 | 3.58 | 0.97 | (1.27) |
| Non-GAAP earnings per HK share | 2.41 | 2.11 | 1.61 | 5.48 | 5.59 | 0.30 | (0.11) |
Alibaba’s share price went up 7% above US$100 upon the release of its latest earnings as its performance exceeded market expectations. It delivered both YoY and QoQ growth in revenue, higher income from operations as well as higher EBITDA margins and earnings per share.
In 3Q23, Revenue increased by 2% while adjusted EBITDA increased by 15% to RMB 59.2 billion and EBITDA margin increased to 24%. This EBITDA performance marks a significant turnaround.
Higher revenues was recorded in the international commerce and Cainiao segments while AliCloud eked out a small growth.
Chinese e-commerce maintained a relatively flat momentum with -1% revenue growth.
The Digital media and entertainment segment continued to be one of the clear underperformers and this was of no surprise since Alibaba made a significant impairment for this segment previously.
Its 6 segments recorded improved EBITA performance on a YoY basis which was offset by higher losses in its innovation segment.
On a QoQ basis, both Cainiao and Alicloud recorded EBITA declines.
Cainiao swung from a profit of RMB 125 million to a loss of RMB 12 million. Alibaba took a leg down from a profit of RMB 434 million to RMB 356 million.
For Cainiao, this was due to its continued investments while for Alicloud this was attributed to lower revenues.
2 Positive takeaways
1) Continued revenue growth in the international e-commerce segment
The International commerce retail businesses include Lazada, AliExpress, Trendyol and Daraz.
During the quarter, the combined order growth of was 3% higher YoY, primarily driven by the robust order growth of Trendyol.
In Southeast Asia, Lazada saw recovering order growth that was up slightly YoY. Lazada continues to improve monetization rate by offering more value-added services and to enhance operating efficiency. During the quarter, losses per order for Lazada continued to improve compared to the same period last year.
Adjusted EBITA margins also improved significantly as 3Q23 recorded -4% loss vs -18% a year ago.
2) Cainiao’s expansion is paying off
For 3Q23, Cainiao’s revenue grew 27% YoY with 72% of its revenue generated from external customers.
This was primarily contributed by the increase in revenue from domestic consumer logistics services as a result of service model upgrade since late 2021 to enhance customer experience, and international fulfillment solution services.
Cainiao continues to expand its international logistics network by strengthening its end-to-end logistics capabilities, including eHubs, line-haul, sorting centers and last-mile network.
In the recent quarter, Cainiao commenced operation of five new international sorting centers, bringing the number of overseas sorting centers in operation to fifteen. In China, Cainiao continues to expand its door-step delivery services.
2 Negative Takeaways
1) GMV decline in Taobao and Tmall
For the quarter ended December 31, 2022, online physical goods GMV generated on Taobao and Tmall, declined mid-single-digit YoY, mainly due to soft consumption demand and ongoing competition as well as a surge in COVID-19 cases in China that resulted in supply chain and logistics disruptions in December.
The declining GMV was driven by weakening demand in fashion & accessories category, which was partially offset by accelerating growth for healthcare, pet care and fresh produce, as well as narrowing decline for consumer electronics category.
It is worth noting that this could be a change in focus with other subsegments such as Taobao deals, Freshippo and Taocaicai recording increased revenues and lowered losses as it optimised user acquisition spending and improved overall operating efficciency
2) AliCloud recorded sequential revenue and EBITA decline
The western tech companies saw significant slow down in the growth of its cloud segment, there were similar concerns weakness Cloud revenue for the major players in China. In addition, there were concerns that the Chinese government is moving its cloud needs away from private tech companies due to security concerns.
AliBaba’s cloud segment saw revenues declined from RMB 20.8 billion to RMB 20.2 billion while EBITA declined from 434 million to 356 million.
Revenue from non-Internet industries grew 9% YoY and contributed 53% of overall Cloud revenue. The non-Internet revenue growth was mainly driven by solid growth of revenue from financial services, education and automobile industries, which was partially offset by the decline in revenue from public services industry.
Revenue from customers in the Internet industry declined by 4% year-over-year, mainly driven by declining revenue from Bytedance that gradually stopped using Alibaba’s overseas cloud services for its international business, partially offset by improving demands from other customers in China’s Internet industry.
Closing statements
Alibaba delivered a solid quarter despite softer demand, supply chain and logistics disruptions due to impact of changes in COVID-19 measures.
Looking ahead, Alibaba expects continued recovery in consumer sentiment and economic activity. The company will focus on driving growth amid the competitive landscape, and creating sustainable, long term value for our shareholders.
During the recent quarter, Alibaba repurchased 45.4 million ADSs for approximately US$3.3 billion under its US$40 billion share repurchase program as part of its ongoing commitment to improve shareholder return.
With the recent purchases, Alibaba has approximately US$21.3 billion remaining under the current authorization, effective till March 2025.
Although it seems like the worst is over, we came up with 2 positives and 2 negative takeaways which does not seem all that positive.
However, with the current positive Chinese sentiments coupled with its share repurchase program, the stock may see some further recovery as it exceeded street expectations. While 3QFY23 marks a turnaround, growth is still tepid , hence the stock is still not on the same growth trajectory as before.
Between October and December 2022, Alibaba’s US shares traded between US$80 and US$90, with the current share price at a US$100 and potentially still looking cheap, we think Michael Burry may have the last laugh.
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