How Alibaba Just Shocked The Market

Alibaba Group Holding Ltd. (BABA) has exceeded market expectations with a remarkable first-quarter financial performance. The company's revenue surged 14%, its largest top-line growth in over a year.

This impressive financial achievement reflects the company's strategic efforts and positions it as a standout performer that remains attractive for the long term.

Financial review

For the three months ended June 30, the company's revenue was $32.29 billion. The performance was driven by a 25% year-over-year increase in international commerce sales, while adjusted Ebitda for the cloud segment grew 106%. 

Non-GAAP earnings of $2.40 per share exceeded forecasts by almost 20% and increased by 38% over the comparable figure for the prior-year quarter. This ends a run of three consecutive quarters of revenue misses and extends Alibaba's winning streak in earnings to seven straight quarters.

Additionally, the Taobao platform saw a 6.5% gain in daily active users year over year thanks to an intensive customer acquisition program. Costs as a percentage of revenue decreased by 6% year over year.

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Source: Alibaba's earnings report

Diverse divisions drive strong revenue growth

Alibaba's main business divisions are Taobao and Tmall, Alibaba International Digital Commerce, Local Services, Cainiao Smart Logistics Network and Digital Media and Entertainment. 

Revenue for the entire Taobao and Tmall group increased by 12% year over year to $15.85 billion. Average daily active users on the Taobao app increased by 6.5% over the previous year, and those on the community and marketplace Xianyu increased by 18%. However, the Cloud Intelligence segment, which creates artificial intelligence models, had a 4% increase only in revenue year over year to nearly $3.47 billion. 

The AIDC segment's revenue climbed 41% from the previous year to $3.05 billion. According to Alibaba, all major retail platforms performed well in the first quarter and contributed to the combined order growth of AIDC's retail businesses, which was over 25% year over year.

Sales for Local Services increased by 30% from the previous year to $1.99 billion, driven by robust revenue growth in the Ele.me and Amap businesses.

Cainiao Smart Logistics Network's revenue grew 34% year over year to $3.19 billion, driven by growth in domestic consumer logistics and overseas fulfillment solution services.

Finally, digital media and entertainment revenue climbed 36% from the previous year to $742 million. Alibaba reported that Youku's overall subscription revenue increased by 5% year over year, mostly due to rising average revenue per user and gaining access to original material of a high caliber.

Strategic moves

Alibaba has undergone significant adjustments recently. In March, the company announced it will be divided into six business units, some of which will be able to raise outside capital and go public.

The company is also getting ready to sell off several of its business units, and their success supports the notion that they will be valuable holdings even after the spinoff. 

Additionally, Alibaba holds a 67% equity stake in Cainiao Smart Logistics. This segment offers supply chain, logistics and delivery services to consumers and businesses that are clients of Taobao and Tmall, Alibaba International Digital Commerce Group and other clients. In the next 12 to 18 months, the company hopes to finish the initial public offering of its logistics arm.

Finally, in order to implement a thorough capital management plan and increase shareholder value, the company has established a capital management committee at the board level. Alibaba has committed to enhancing shareholder return by implementing a strong capital allocation mechanism.

Resilience, value and potential amid challenges

Despite the unexpectedly low forecasted earnings growth, Alibaba's stock is still fundamentally appealing at a forward multiple of 11 times earnings. Its enterprise value/Ebitda ratio is also around 11, but is lower than the industry average, suggesting the stock may be undervalued. 

The GF Value Line also suggests the stock is undervalued.

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Even with substantial gains from its October 2022 lows, the stock is still cheap. The valuation, in this case, is significantly lower than that of any comparable tech company in the United States, and it even compares favorably to some of its Chinese competitors. However, investors should be aware of Alibaba's key risks, such as elevated political unrest, trade restrictions and economic challenges. 

Takeaway

Alibaba's recent financial insights present a mix of accomplishments and considerations. As concerns about a global economic slowdown persist, the absence of financial forecasts is noteworthy, potentially indicating a need for proactive management actions. The impressive revenue surge, while marking a significant rebound, highlights the company's resilience. Notably, its diverse divisions like international commerce and cloud computing exhibited remarkable growth.

However, while non-GAAP earnings exceeded expectations, cautious optimism prevails given the economic landscape. Alibaba's strategic moves, including spinoff plans and innovation ventures, align with future-focused initiatives. Amidst uncertainties, a compelling valuation and strategic ventures underline Alibaba's potential.


Originally published on GuruFocus.com

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