Alibaba’s third quarter revenue increased by 2% to $40.7bn on an underlying basis, falling just shy of analyst estimates. Cloud Intelligence sales grew by 36% driven by strong demand for AI from both retail and business customers.
Growth in the core E-commerce division was 6% with most of the uplift due to a 56% increase in the small, but growing, quick commerce business.
Operating profit fell 74%, largely reflective of falling profitability within E-commerce.
Free cash flow fell 71% to $1.6bn, impacted by continued high levels of investment in quick commerce.Net cash was $6.5bn .
Alibaba paid out $4.8bn in dividends and repurchased $1.1bn of its shares over the quarter.
The shares were down 4.5% in pre-market trading.
Our view
Sluggish sales and tanking profits in Alibaba’s core E-commerce business continued into the third quarter, with better-than-expected cloud growth unable to give a lift to sentiment on the day.
The company’s investing heavily in Cloud Intelligence, 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 ten 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 in 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. 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 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. 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. Meanwhile, the Iran war raises significant uncertainty for the global economy and with it consumer confidence.
Investors seeking exposure to themes such as AI and instant delivery need to weigh Alibaba’s prospects against those of established international players with greater geographic diversity.
Alibaba’s bold investment plans in future-facing technology could see it become a regional powerhouse in AI products, infrastructure, and services.The prizes here are large, with upside if Alibaba meets market expectations. However, with much of the group’s forecasted revenue growth still dependent on the struggling E-commerce business, we see more 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.