Alibaba’s fourth quarter revenue of $35.3bn grew by 11% on an underlying basis. Cloud Intelligence revenue was up 38% boosted by triple digit growth in sales of AI-related products.
The Chinese E-commerce business grew revenue by 6% to $17.7bn, with 57% growth in Quick commerce outpacing sluggish performances across the rest of the division.
Underlying cash profit (EBITDA) fell 61% to $2.4bn (35% below consensus) as investments across the business more than offset profitability improvements elsewhere.
Free cash flow has turned negative, with an outflow of $2.5bn. Net cash was $3.9bn.
The annual dividend was flat at $1.05 per share.
The shares were down 2.2% in pre-market trading.
Our view
Alibaba’s declining profitability in the fourth quarter initially disappointed the market. Later in the day, a confident presentation by management lifted the mood, revealing that AI is on track to soon become the dominant revenue stream in the fast-growing Cloud Intelligence division.
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, allowing businesses to rapidly deploy products while Alibaba does the heavy lifting. The flipside of that 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 Iran war raises significant uncertainty for the global economy and, with it, consumer confidence. For now, Chinese retail sales growth remains firmly in low single-digit growth territory.
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 likely if Alibaba meets market expectations.
However, recent delivery on that front has been poor, and a decent chunk of the group’s forecasted revenue growth is 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.