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Alibaba - revenue misses expectations

Alibaba's revenue rose 3% to $29.0bn in the three months to the end of September...

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Alibaba's revenue rose 3% to $29.0bn in the three months to the end of September. This was lower than expected and reflected the more challenging economic conditions and lockdowns in China. Operating profit rose 68% to $3.5bn, largely reflecting reduced losses in Local consumer services and the benefits of scale elsewhere.

The group's key China commerce division saw declines in the quarter, with weaker consumption demand taking its toll. There was a 4% revenue increase in Alibaba's Cloud business.

Costs and expenses of $25.6bn were 5% lower than the previous year, largely because of a drop in sales and marketing spending.

As at 16 November the group had repurchased $18bn of its own shares under the existing $25bn share buyback programme. Alibaba had a net cash position of around $66bn at the end of the quarter.

The shares were unmoved following the announcement.

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, with 65% of total revenue in the quarter just gone. China Commerce includes Taobao, which is China's largest shopping website, and TMall, which sells higher-end and branded goods.

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. China has been hit by renewed lockdowns in major cities since spring, meaning supply chain and logistics are challenging. More worrying is the recent weakening of demand. This is a function of the weak economic outlook, 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 improve.

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 $5bn 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
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: 17th November 2022