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Alibaba - announces plans to spin off Cloud business

Alibaba's revenue rose 2% in the fourth quarter, to $30.3bn. Growth was driven by International Commerce, Local Consumer Services...

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Alibaba's revenue rose 2% in the fourth quarter, to $30.3bn. Growth was driven by International Commerce, Local Consumer Services and Cainiao. Performance was held back by a 3% dip in the biggest division, China Commerce. Consumer behaviour has started to improve in China, but this wasn't enough to offset declines.

Despite the lower revenue, good cost control helped underlying cash profits (EBITDA) rise 37% to $4.7bn.

Free cash flow increased significantly to $4.7bn, reflecting the non-repeat of an anti-monoply fine as well as higher dividends received. Alibaba had net cash of $67bn at the end of the period.

Following the recently announced plans to turn its existing divisions into six independent businesses, Alibaba has announced plans to spin off the Cloud Intelligence business. This will be listed as a separate company and Alibaba shareholders will receive a stock dividend. The group's also planning to explore listings of it logistics and grocery businesses.

Alibaba shares fell 0.9% in pre-market trading.

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Our view

Single-digit revenue growth isn't what investors of Alibaba expect from what's meant to be a growth stock. Trouble is stemming from lacklustre growth in the core Chinese Commerce business. Alibaba is China's largest e-commerce business, and there are concerns the weak performance is a sign of a broader weakening in consumer spending in the region.

The path to a demand rebound is unclear. And that's partly why the group's making inroads to spin off various businesses, which could unlock value. This includes separate IPOs of its grocery and logistics divisions. Perhaps the biggest move is the formal approval to spin off the cloud services division, by distributing stock to shareholders.

So far nothing's guaranteed, but should it go ahead, this could mark the loss of a growth opportunity. On balance though, we think streamlining and focussing the business is no bad thing.

The Chinese giant is responsible for multiple businesses across e-commerce, digital media and entertainment, logistics and cloud computing, to name just a few.

The biggest segment, by some way, is China Commerce. China Commerce includes Taobao, which is China's largest shopping website, and TMall, which sells higher-end and branded goods. It's this area that suffered from weak demand last quarter. This could remain subdued and will depend on the shape of China's economic recovery.

Alibaba also houses the impressive AliExpress, which connects global consumers to a vast marketplace, where they can buy directly from manufacturers all over the world.

There are challenges. Supply chain and logistics are still tricky, despite some things easing. We're also mindful of stiff competition in the sector and a government tech-crackdown. There's no denying Alibaba's huge scale, but we are in the midst of a lull. The extent and depth of this is hard to map until wider economic conditions are more stable.

The worst of the effects for profits are being offset by cost cutting efforts. This is admirable, but not a permanent solution. Volumes will have to pick up the slack eventually.

And keeping sales on an upwards trajectory well into the future is the responsibility of international markets. The group's responding to the slowdown in its domestic market by doubling down efforts to expand in South Asia, an area with good growth potential.

A shining positive is Alibaba's cash generation - it has billions of free cash flow pumping round the business each quarter. This gives it enormous flexibility in tough times, as well as the ability to throw money at expansion efforts. It also allows potential for substantial share buybacks but remember no shareholder returns are guaranteed.

Alibaba's scale and usership base is formidable and it has the foundations to do well. However, there are some very real headwinds blowing.

If international expansion efforts take off at the required speed, Alibaba could unlock enormous growth, but that's a very big 'if'. Sentiment in the short-term is likely to be swayed by movement, if any, in external fundraising efforts from the newly independent business units.

Alibaba key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 18th May 2023