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Alibaba - first quarter sales beat expectations

Alibaba's revenue for the first quarter came in ahead of market expectations, growing 14% to $32.3bn.

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Alibaba's revenue for the first quarter came in ahead of market expectations, growing 14% to $32.3bn. Growth was seen in all segments with the stand-out being a 41% increase from International Commerce.

Operating profits were up by 70% to $5.9bn. Some of this was down to improved efficiency but $1.0bn of the uplift related to a non-cash accounting adjustment.

Free cash flow leapt 76% to $5.4bn reflecting an increase in profitability and a decrease in capital expenditure. Alibaba had net cash of $47.6bn at the end of the period.

The Group spent $3.1bn on share repurchases in the first three month of the financial year.

The shares were up 4.8% in pre-market trading following the announcement.

View the latest Alibaba share price and how to deal

Our view

Alibaba has made a solid start to the financial year. But in the absence of guidance we remain cautious on the immediate outlook. That's because Alibaba is China's largest e-commerce business, and the economic alarm bells are well and truly ringing in the land of the red dragon. Other challenges to note are stiff competition in the sector and a government tech-crackdown.

The path to a sustained 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. Which includes Taobao, China's largest shopping website, and TMall, which sells higher-end and branded goods. Recent marketing initiatives such as the 6.18 Shopping Festival have helped to revive fortunes, but we have some concerns as to how long this can offset the impact of a faltering economy. Cost cutting has gone some way to improve profitability but most of the recent savings have been made in product development, not an area we believe should be neglected for long if it want to maintain its competitive edge.

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. We think the international markets represent an exciting opportunity for the Group. It's been doubling down efforts to expand in South Asia, an area with good growth potential. And so far, the Group's doing a good job at expanding overseas.

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.

If international expansion efforts take off at the required speed, Alibaba could unlock enormous growth, but that remains a very big 'if'. It's still dwarfed by the Chinese operations, which we think will be a bigger driver of sentiment in an increasingly challenging short-term. Another potential catalyst to look out for is 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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 10th August 2023