Underlying revenue climbed 15% to $34.8bn in Alibaba’s second quarter, around 2% better than market forecasts. Growth was broad-based with Cloud Intelligence and Quick commerce the stand-outs at 34% and 60% respectively.
Operating profit plummeted 85% to $0.8bn (about $2.0bn forecast) reflecting high levels of investment into the faster growing parts of the business. That same dynamic saw free cash flow swing from a $2.0bn inflow to an outflow of $3.0bn.
Net cash balances were $8.5bn.
Alibaba paid out $4.9bn to shareholders in the quarter primarily through a dividend payment.
The shares were up 4.6% in pre-market trading.
Our view
Trading in Alibaba’s shares had been running hot ahead of second quarter earnings. But despite a miss on the bottom line, investors responded well to a better-than-expected revenue performance, boosted by an acceleration in growth at the Cloud Intelligence unit.
It’s a space where the company’s investing heavily, and the division is starting to see some impressive profit growth. That could accelerate further as it pivots to higher-margin cloud services, including AI-related products which have shown triple-digit growth for nine consecutive quarters. But at just over 10% of this year’s forecasted operating profits, it’s likely to be some time before the division makes a material impact on the group’s bottom line.
Alibaba is China's largest e-commerce company, and that part of the business remains the key profit driver. But Chinese retail remains a tough battleground, and in the face of intense competition, the fight to keep prices low and retain market share may put a ceiling on growth.
In an effort to stay relevant, Alibaba is throwing its weight behind its on-demand delivery service. It’s enjoyed a successful launch, but here too competition is fierce, and high start-up costs are dragging on the group’s profits. That’s something investors are prepared to tolerate, but sentiment is likely to sour if signs of attractive returns on that investment don’t materialise.
The business has a strong balance sheet, but elevated levels of investment in cloud, AI, and delivery services is 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. While Washington and Beijing have reached a truce in trade discussions, the absence of a firm deal means there’s still scope for tensions to flare up again.
Investors seeking exposure to themes such as AI and instant delivery need to weigh up Alibaba’s prospects against established international players with greater geographic diversity.
Alibaba’s bold investment plans in future-facing technology have gone down well with investors. The prizes up for grabs here are large, and we still see some potential upside at the current valuation. However, we also see a greater level of risk compared to the US names leading the AI race.
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 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 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.