Alibaba Earnings Preview: Can Business Revitalize Under Strategic Adjustments? Analyzing Short-Term Challenges and Long-Term Prospects for Share Prices
Alibaba Group Holding Limited ( $Alibaba (BABA.US)$ & $BABA-W (09988.HK)$ ) will release its 4QFY24 financial report before the market opens on May 14th, Eastern Time. Considering the current strategic adjustments to the Taotian platform and the potential development opportunities in international e-commerce, we anticipate Alibaba's operations are getting back on a healthy track; however, as the related strategic adjustments are still in the early stages, we expect the company's stock price performance to remain poor in the short term. As of May 9th, the company's stock price was $78.46.
According to Bloomberg consensus expectations:
(1) Alibaba's total revenue for this quarter is expected to be $31 billion, a year-over-year increase of 1%, and a quarter-over-quarter decrease of about 16% due to seasonal factors (Singles Day).
(2) Alibaba's net profit is expected to be $2 billion, a year-over-year decrease of 42%, with hopes of long-term improvement.
(3) EPS is expected to be $1.45, a year-over-year decrease of about 7.6%, with expectations that this trend will not continue.
I. Business Model and Structure
Alibaba Group is a leading global e-commerce and technology company headquartered in China. Initially starting as a B2B online trading platform, Alibaba aimed to connect global buyers and sellers to facilitate international trade. Today, Alibaba has evolved into a diversified business empire, covering e-commerce, financial technology, cloud computing, digital media and entertainment, logistics, and more.
Breaking down revenue sources, Alibaba's main business segments include Taotian Group, International Digital Commerce Group, Cainiao Smart Logistics Network, Alibaba Cloud Intelligence Group, and Digital Media and Entertainment Group. Among these:
(1) Taotian Group: The world's largest online shopping platform, providing online shopping services to consumers, with revenue accounting for more than 40% of the group's total revenue, and it is the most critical foundation for the company's growth.
(2) International Digital Commerce Group: Focused on Alibaba's globalization strategy, providing cross-border trade services to domestic and foreign merchants through platforms such as Alibaba International Station and AliExpress. This segment has seen rapid revenue growth in recent years.
(3) Cainiao Smart Logistics Network: Alibaba's logistics infrastructure platform, offering a suite of logistics solutions including warehousing, transportation, distribution, and customs clearance, supporting the logistics needs of Alibaba and external merchants, with recent rapid growth.
(4) Alibaba Cloud Intelligence Group: Alibaba's cloud computing service brand, providing a comprehensive range of cloud services to enterprises, including computing, storage, databases, networking, security, big data, artificial intelligence, and more.
(5) Digital Media and Entertainment Group: This segment covers Alibaba's diversified content production and distribution businesses in film, music, games, sports, literature, etc., including brands such as Youku Tudou and Alibaba Pictures.
Chart：Composition of Alibaba's core business
Considering that revenue from the Taotian Group accounts for more than 40% of Alibaba's total revenue, making it the main pillar of the company's revenue, and given the rapid development momentum of international digital commerce, Cainiao, and cloud intelligence businesses in recent years, which have become the engine driving the company's revenue growth, we will next analyze these businesses to forecast Alibaba's performance trend.
II. Taotian Group: The low-price strategy is expected to show initial results, but with limited contribution to short-term revenue
Alibaba's e-commerce operations have always been at the forefront of the domestic e-commerce industry. However, after the end of the pandemic, various e-commerce platforms have invested heavily in user growth, leading to an increasingly fierce battle for market share and causing Alibaba's market share to continually decline.
According to Deloitte's 2023 e-commerce industry report, Alibaba's market share has gradually reduced from 54% at the beginning of 2021 to 46% at the end of 2022, with recent surveys indicating a further drop to 44.6%. This is an important reason for the recent poor performance of Taotian Group's revenue.
In this context, the company's senior management indicated in the earnings call last quarter that a series of reforms will be carried out on the Taotian platform's sales strategy, adopting a low-price strategy to compete with emerging e-commerce platforms such as Pinduoduo and Douyin. The company has also introduced a new business called 1688 Yanxuan on the Taobao platform, focusing on providing high-quality, cost-effective products to help the company capture more e-commerce market share. We expect Alibaba's series of operations to have a positive impact on the company's performance.
Moreover, according to data from the National Bureau of Statistics, the total retail sales of consumer goods nationwide increased by 5.5% year-on-year in January-February 2024, and the online retail sales of physical goods increased by 14.4% year-on-year. Benefiting from strong online consumption and the continued promotion of the platform's low-price strategy, we anticipate that Taotian's GMV growth rate will recover to a certain extent in FY2024Q4, which will improve e-commerce revenue.
According to Bloomberg consensus expectations, Taotian Group's total revenue for this fiscal quarter is expected to be approximately $12.8 billion, a 2% decrease year-over-year but with a narrowing decline. Considering the platform's continued investment in pricing power and consumer experience during the first quarter, we expect Taotian Group's revenue is likely to exceed market expectations in the upcoming quarters.
III. International Digital Commerce Group: Increased spending on cross-border market development expected to slow growth
With the post-pandemic recovery of overseas markets, Cainiao's International Digital Commerce Group business has also witnessed rapid growth. Historical data shows that the company's international e-commerce business has achieved high-speed growth for four consecutive quarters, creating significant development opportunities for the company.
This quarter's market expectations suggest that this growth trend will continue, but the year-over-year growth rate will slow down due to the following reasons:
(1) Driven by robust growth in overseas retail platforms during the first quarter, international e-commerce business revenue is expected to maintain growth. Benefiting from strong growth in the AE Choice business during the first quarter, AliExpress's total order volume is expected to maintain rapid growth; additionally, Trendyol's e-commerce business is expected to continue steady growth, maintaining its lead in the Turkish market while expanding into the Middle East.
(2) The company's increased focus on developing cross-border markets may result in a slowdown in revenue growth. According to JPMorgan data, the International Commerce Group experienced a revenue loss of over 4 billion yuan this quarter due to the expansion into international markets, but JPMorgan believes these investments are beneficial for the company's long-term development.
According to Bloomberg consensus expectations, this quarter's revenue for Alibaba's International Commerce Group is estimated to be around $3.5 billion, an approximate 30% increase year-over-year. The growth rate is expected to slow down due to the company's international market expansion efforts, with a predicted 10% quarter-over-quarter decline in revenue. However, we believe this move will have a very positive effect on the company's long-term development.
Chart: Growth in Alibaba's International Digital Commerce Revenue
IV. Cainiao Logistics: IPO application withdrawal may impact business growth rate
On March 26th, Alibaba announced that its logistics subsidiary, Cainiao, had withdrawn its application for an initial public offering and listing on the Hong Kong Stock Exchange. Alibaba's explanation for this move is that the withdrawal of Cainiao's IPO application will help the company focus on its logistics business, execute Alibaba's own global network expansion plan, and strengthen Alibaba's core competitiveness in the global logistics field.
However, given that Cainiao is an integral part of Alibaba's core business, the market generally believes that the cancellation of Cainiao's IPO plan is due to Alibaba's own serious development difficulties and the continuous devaluation of Cainiao's market valuation. This move might indicate a contraction of Alibaba's own business.
According to Bloomberg consensus expectations, Cainiao's total revenue for the first quarter is expected to be $3.06 billion, approximately a 54% increase year-over-year, which is about 15% lower than the year-over-year growth rate of the previous fiscal quarter.
Chart: Expected changes in Cainiao's revenue (in million USD)
V. Cloud Intelligence Group: Strategic focus on public cloud expected to boost revenue
Alibaba has always been an outstanding cloud service provider in China, with its Tongyi Qianwen and other brands now launching version 2.5, officially competing with the ChatGPT 4.0 version, showcasing the company's exceptional capabilities in cloud computing. In this quarter, the company has taken measures such as price reductions to aid the development of this business, and we expect cloud service revenue to exceed market expectations for the following reasons:
(1) On February 29th, Alibaba Cloud announced price reductions. This price cut involved over 100 products, including cloud servers ECS, cloud databases RDS, etc., with an average reduction of 20% and up to 55%. This price reduction will continue to enhance the market competitiveness of Alibaba Cloud products in the following quarters.
(2) While continuously innovating AI technology, the company strategically focuses on the public cloud, enhancing income quality by reducing low-profit margin projects and spreading R&D costs. This strategy is likely to help the company capture more high-quality customer demands and maintain stable revenue growth.
According to Bloomberg consensus expectations, the revenue for the Cloud Intelligence Group in the first quarter is expected to be $3.5 billion, a year-over-year decrease of 4%. However, according to current forecasts from major financial institutions, the company's cloud service revenue is expected to grow by around 3%, reaching approximately $3.8 billion. We anticipate that the growth of Alibaba's Cloud Intelligence Group will likely exceed Bloomberg's expectations.
Overall, although the expected revenue growth rates for Cainiao and the International Business segments have decreased compared to the previous year, they still maintain a relatively high level. Additionally, given that the revenue for the Taotian Group has improved year-over-year, the total revenue is expected to see a slight increase, although it may experience a quarter-over-quarter decline due to seasonal factors (such as Singles Day and Double 12).
According to Bloomberg consensus expectations, Alibaba's total revenue for this quarter is expected to be $31 billion, a year-over-year increase of 1%, and a quarter-over-quarter decrease of approximately 16% due to seasonal factors (Singles Day).
VI. Profitability and Valuation Analysis
Profitability
From the cost perspective, since the company's e-commerce operating model has matured, we expect the sales and administration expenses for the Taotian Group to not fluctuate significantly. However, it is important to note that Alibaba's cloud computing division has been emphasizing the reduction of supply chain procurement costs and idle resource costs, and spreading R&D costs, which is expected to lower the company's expense rate.
According to Bloomberg consensus expectations, Alibaba's total operating expense rate is expected to decrease from 31.35% in the previous quarter to around 26% this quarter, but still 5% higher than the same period last year.
Furthermore, according to third-party data, the monetization rate for Alibaba this quarter has decreased from around 4.4% in FY23 to 3.8% this quarter, also having a significant negative impact on the company's profit.
Taking these factors into account, we anticipate Alibaba's profit performance will remain poor. According to Bloomberg consensus expectations, Alibaba's net profit is expected to be $2 billion, a year-over-year decrease of 42%, and EPS is expected to be $1.45, a year-over-year decrease of about 7.6%. However, we expect profits to improve in the long term.
Valuation
Considering organizational changes and strategic adjustments, Alibaba's revenue growth rate is expected to gradually recover. Major financial institutions have generally raised their valuations for Alibaba, with the company's market valuation at 9.71 times PE, which is at a relatively low level among its industry peers. We believe that Alibaba's implementation of a low-price e-commerce strategy and strategic reforms with the Cloud Intelligence Group will bring more investment value to the company, and the current market valuation of the company is undervalued.
VII. Stock Price Expectations and Investment Value Analysis
From a shareholder return perspective, the company announced an expansion of its share buyback program, continuing to strengthen shareholder returns. In February 2024, the company announced an additional $25 billion to its share buyback plan, increasing the total buyback program to $65 billion, with the extended share buyback plan effective until the end of March 2027. Over the next three fiscal years, there is an additional share buyback quota of $35.3 billion. Therefore, the company's buyback rate is expected to exceed 6% in FY24, and with a dividend yield of 1.27%, it is expected to achieve a generous shareholder return of approximately 7% in FY24.
Looking at stock performance, since the beginning of the year, Alibaba's stock has risen by 1.23%, with overall significant fluctuations. Although the company has started to focus on reforms in e-commerce and cloud computing, these changes are unlikely to have a significant impact on performance in the short term. Moreover, the consecutive decline in profits may also generate negative sentiment in the market regarding Alibaba's performance.
Given the company's expected considerable shareholder returns for FY24, it is likely that Alibaba's stock will experience central upward volatility following the release of this financial report. Investors can actively adopt a straddle strategy, engaging in strategies to reduce volatility.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Another earnings season is here. What to expect this time？
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