First-quarter revenue rose 9% to $39.6bn (as expected). This was driven by e-commerce growth of 4% and high double-digit growth in AI Cloud and Compute Services.
Adjusted cash profit (EBITA) fell by 30% to $4.0bn, largely because of technology investments across the business.
Free cash outflows more than doubled to $6.6bn, driven by a sharp increase in capital expenditure on AI infrastructure to meet growing demand. The net cash position stands at $4.6bn.
$162mn of share buybacks were completed in the period.
The shares fell 3.4% in pre-market trading.
Our view
Alibaba’s first-quarter results were broadly as expected, with steady e-commerce growth and strong AI-related demand pushing revenues higher. But heavy investment in AI infrastructure weighed on profitability, with the pace of spending seemingly catching markets a touch off guard.
Its full-stack capabilities leave Alibaba well placed to capture regional demand for AI. The Model as a Service (MaaS) offering can help customers accelerate AI adoption by enabling businesses to rapidly deploy products while Alibaba does the heavy lifting. The flip side is that it’s a highly capital-intensive approach, and at around 7% of last year’s operating profit, there’s a long way to go before it becomes the main event.
Alibaba is also China's largest e-commerce company, and that part of the business remains the key profit driver. There is hope that AI can reinvigorate this part of the business, too, as intense competition is weighing on both growth and profitability.
In an effort to stay relevant, Alibaba is throwing its weight behind its on-demand delivery service. That’s enjoyed a successful launch, but here too competition is fierce, and high start-up costs are dragging on the group’s profits.
The business has a strong balance sheet, but elevated levels of investment in cloud, AI, and delivery services are putting cash generation under pressure, and we’re likely to see demands on the group’s capital intensify. Alibaba continues to return cash to shareholders through share buybacks and offers a modest dividend yield. However, no payouts are guaranteed, especially if ongoing investments fail to generate a good return.
Alibaba is subject to a complex influence of macroeconomic forces. The Chinese consumer is not the force it once was, and e-commerce is no longer an untapped opportunity. Meanwhile, the war in Iran raises significant uncertainty for the global economy and, with it, consumer confidence. For now, Chinese retail sales growth remains firmly in the low single-digit range.
Alibaba’s bold investment plans in future-facing technologies could make it a regional powerhouse in AI products, infrastructure, and services. AI-related revenues are growing rapidly, and the prizes here are large, with upside likely if Alibaba meets market expectations. However, a decent chunk of the group’s forecast revenue growth still depends on the struggling e-commerce business. We see greater risk here than in US names leading the AI race.
The author owns Alibaba shares
Environmental, social and governance (ESG) risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, such as electronic components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Alibaba’s management of ESG risks is strong.
Key risks the group’s exposed to relate to the handling of private information, specifically high volumes of Personally Identifiable Information (PII). Its use of analytics puts it at risk of data and privacy breaches. Increasing regulatory scrutiny in China increases Alibaba’s exposure to business ethics risk. Alibaba’s Chief Risk Officer oversees data protection and information security, with the privacy policy following industry best practice. Controls around business ethics risk could be enhanced through a clear governance structure and regular ethical risk assessments, which are currently lacking.
Alibaba key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember that yields are variable and not a reliable indicator of future income. Keep in mind that 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 LSEG. 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.