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Alibaba - profits better than expected, outlook brightens

Revenue rose 2% to $35.9bn in the final quarter, with growth held back by supply chain and logistics disruptions and increased competition.

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Revenue rose 2% to $35.9bn in the final quarter, with growth held back by supply chain and logistics disruptions and increased competition. The group's biggest division, China Commerce, saw revenue fall 1%, reflecting declines in customer management revenue. This includes marketing products sold to merchants on its e-commerce platforms. On an underlying basis, operating profit rose 16% to $7.5bn, which was better than expected.

Alibaba spent $3.3bn on share repurchases in the quarter.

Looking ahead, the group expects consumer sentiment to improve, reflecting the reopening of China.

As at the end of December, Alibaba had net cash of around $66bn.

The shares rose 6.4% in pre-market trading.

View the latest Alibaba share price and how to deal

Our view

It would be shorter to explain what Alibaba doesn't do. This 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, but with the reopening of China and a softer economic landing looking possible, consumer sentiment is expected to pick up.

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.

We'd be remiss not to mention the Cloud business too. It's a small fish for now, and ongoing investment means only a small drop of this is making its way to profit.

It's a great industry to be in, but Alibaba's cloud business lags some of the big global competitors. The regulatory environment has been described as an "onslaught", making rapid tech growth more difficult. For now, Amazon and Microsoft's Cloud businesses look a lot more compelling.

A shining positive is Alibaba's cash generation - it has free cash flow of around $11bn 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.

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'. Concerns are reflected in its price to earnings ratio, which could be compelling - only for those prepared to take on some increased external risk.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 23rd February 2023