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Alibaba’s 2Q2021 Earnings: Is it still a buy?

China, Tech Stocks

Written by:

Zhi Rong Tan

Alibaba recently published its quarterly report. As investors, you must be curious about its performance and how the crackdown has affected its earnings. With that, let’s take a look at its report and see how Alibaba has fared in the face of the government’s crackdown on food delivery, private tutoring, gaming, and other industries.

For a recap, check out my earlier article for a summary of Alibaba’s business, in which I broke down the company’s operations and offered my opinion on its valuation.

A short run-through of Alibaba business from the previous article:

In total, Alibaba’s core commerce business makes up 87% of the total company revenue from its range of sub business like Taobao, Tmall, AliExpress, Lazada, Cainiao and many more.

Other than e-commerce, Alibaba has been investing heavily in its Cloud Computing business. As of FY2021, its cloud computing segment makes up 8% of the companies total revenue.

The remaining 5% comes from:

  • its Digital media and entertainment segment,
  • Innovation initiatives and
  • Others.

Alibaba’s 2Q2021 financial results

Income

For the latest quarter, global annual active consumers across its ecosystem reached 1.18 billion, which is an increase of 45 million compared to the previous quarter.

With that, Alibaba’s revenue increased by 34% year over year, reaching RMB205,740 million (US$31,865 million).

Even without the Sun Art consolidation, revenue would have increased by 22% year over year to RMB187,306 million (US$29,010 million).

Source: Finbox

We can see from the graph that Alibaba’s growth has not slowed, indicating that there is still room for the company to grow.

Source: Finbox

While Alibaba’s top line has performed impressively, its bottom line appears to be telling a different picture. The income from operations was down 11% from the previous year, at RMB30,847 million (US$4,778 million).

This decrease was primarily due to the company’s increased spending on growth initiatives in its China retail marketplaces, such as Idle Fish, as well as increased spending on strategic areas, such as Community Marketplaces, Taobao Deals, Local Consumer Services, and Lazada.

Looking at the infographics below, Alibaba’s investments appear to be paying off, with most of these businesses showing impressive growth.

What about Alibaba’s net income?

It’s the same story as the company’s operating income. This quarter’s net income attributable to ordinary shareholders was RMB45,141 million (US$6,991 million), a substantial improvement over the previous quarter, but only because Alibaba was hit with a hefty fine the last quarter.

In fact, when comparing Alibaba’s net profits for the first quarter of 2022 to the quarter prior to the penalties, the present profit may appear to be below par. Nonetheless, I think it’s a fantastic result, especially with the crackdown happening.

Source: Finbox

Alibaba’s margins

Alibaba’s operating margin has dropped by 11%, according to its financials. The firm attributes this to its strategic investments, growth plans, and support to its merchants during Covid. While this may be the case, I believe that the crackdown on Alibaba’s anti-monopolistic behaviour may have played a role as Alibaba could no longer ‘force’ its merchants to sell exclusively on its platform.

That being said, a operating margin of 15% is still healthy. As a comparison, Amazon currently has a operating margin of 6.68% as shown below.

Source: Macrotrends

Performance of individual business segments

Now that we’ve seen the larger picture, let’s look at each segment individually to see how it’s progressing.

Total Commerce

Overall, Alibaba’s e-commerce business is growing well, with a 35% year-on-year increase over the previous year.

China’s retail marketplaces had over 939 million mobile monthly active users, up 14 million from the previous quarter. It has also been successful in expanding its influence into less developed areas.

  • Sun Art had a 28% increase in online orders year over year, with the shared inventory initiative with Tmall Supermarket accounting for most of the rise.
  • Ele.me saw impressive order growth of over 50% year over year during the quarter ended June 30, 2021, thanks to increased investments.
  • Cainiao Network, Alibaba’s logistics arm, had a solid revenue increase of 50% year over year and was driven by increasing merchant adoption of “Fulfilled by Cainiao” services on its cross-border businesses, including AliExpress and Tmall Global.
  • Lazada saw over 90% year-over-year order increase as it continues on its localization strategy. FYI, this is something Shopee did to attract users, which caused Lazada to lose its top position in different Southeast Asian markets. I’m pleased Lazada recognizes this and is adapting its strategy rather than simply copying and pasting what Alibaba China has done.

Cloud Computing

Alibaba‘s cloud computing revenue increased by 29% year over year to RMB16,051 million (US$2,486 million) in the June 2021 quarter, owing to solid revenue growth from customers in the Internet, financial services, and retail industries.

However, compared to the previous quarter (with a 59% year-over-year increase), Alibaba’s current 29% growth does not appear as spectacular. The slower quarterly revenue growth was primarily due to a revenue reduction from its top cloud computing customer in the Internet industry, who has discontinued its overseas cloud services. 

This does not appear to be a significant issue at the moment, given the reason for the stoppage is not related to inferior software. However, moving forward, we should keep this in mind and observe its growth in this segment.

Digital Media and Entertainment

Revenue from its digital media and entertainment segment was up by 15% totalling RMB8,073 million (US$1,250 million), compared to RMB6,994 million in the same quarter of 2020. This is primarily due to the revenues from Youku, Alibaba Pictures, and other entertainment businesses.

We can also see that the loss in the digital media and entertainment industry is narrowing, having improved from RMB1,321 million to RMB419 million (US$65 million). As a result of the lowered losses of Youku and Alibaba Pictures, its EBITA margin has improved to negative 5% from negative 19%.

Lastly, Youku’s daily average subscriber base climbed by 17%.

Cash Flow

Operating activities generated RMB33,603 million (US$5,204 million) in net cash.

Non-GAAP free cash flow was RMB20,683 million (US$3,203 million), down from RMB36,570 million in the same quarter of 2020, owing primarily to a partial settlement of the RMB18,228 million fine in the amount of RMB9,114 million (US$1,412 million) and a decrease in profit due to its investments in key strategic areas.

Source: Finbox

Cash, cash equivalents, and short-term investments totalled RMB470,824 million (US$72,921 million) as of June 30, 2021, compared to RMB473,638 million as of March 31, 2021.

At this point, I believe Alibaba is in good shape and should not face any financial or acquisition issues in the near future.

Source: Finbox

Alibaba’s share repurchase

Alibaba had repurchased around US$3.7 billion in shares as of April 2021.

They also indicated in their earnings reports that they will be increasing their share repurchase program from US$10 billion to US$15 billion, which will be the company’s most extensive repurchase program ever.

This should reassure investors while also demonstrating the company’s confidence in its long-term growth prospects.

How did investors react to the news?

Alibaba’s stock price remained relatively unchanged from the previous day following the announcement. This is most likely attributable to the current negative sentiment in the Chinese stock market. With that in mind, is it time to buy into Alibaba?

Author’s Opinion

For investors, Alibaba’s latest earnings announcement is reassuring rather than spectacular. This report provides confidence that the crackdown had no impact on the company’s core business. However, in terms of increased growth rate, it wasn’t quite as impressive. Nonetheless, Alibaba’s last quarter growth rate is still extremely good, indicating that the company is still growing.

While reading the earnings report, I’d also like to point out that I could see senior management beginning to recognize the Chinese government’s influence. Throughout the account, you can see Alibaba doing what the Chinese government would want them to do, such as paying attention to data security by conducting sales compliance checks and emphasizing how these policies would support the long-term growth of the internet business. Self-transformation is preferable to forced change.

Source: Finbox

In terms of valuation, we can compare it with its counterparts. At its current price, Alibaba offers a better deal.

Looking at the chart, its growth rate is the same if not better than Amazon‘s while trading at a cheaper valuation. This is understandable due to the China regulator risk, but the difference is simply too big. For comparison, Amazon PE ratio is 57.7x with a 37.8% growth rate, while Alibaba is almost halved at 23.9x with a 40.2% growth rate.

With that, I feel Alibaba is way undervalued at its current price and offers a great risk to reward ratio for investors.

Disclosure: The author has positions in Alibaba

p.s. click here to read more articles on China stocks

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