In my last article, I wrote about what I think Charlie Munger (Trades, Portfolio) has missed on his investment in Alibaba Group Holdings (BABA, Financial). Two days after my article was published, Alibaba reported Q2 FY2024 earnings results. The quarterly result was in line with expectations. The company also announced its “first annual dividend distribution for fiscal year 2023, with an aggregate amount of approximately US$2.5 billion.”
However, along with the earnings results and the announcement of the annual dividend were two pieces of bad news for shareholders. First, the U.S chip export restrictions have hurt its cloud business, therefore, the company has made the decision to cancel the previously planned spin-off of its cloud unit. Secondly, a separate regulatory filing shows that Jack Ma's family trust is selling 10 million shares of Alibaba's stock for a total of about $871 million. Alibaba's stock was down more than 9% after the bad news.
Q2 FY2024 results
According to the company's filings, Q2 FY2024 was a decent quarter for Alibaba.
Revenue was RMB224,790 million (US$30,810 million), an increase of 9% year-over-year.
Income from operation was RMB33,584 million (US$4,603 million), an increase of 34% year-over-year.
Non-GAAP net income was RMB40,188 million (US$5,508 million), an increase of 19% year-over-year.
Net cash provided by operating activities was RMB49,231 million (US$6,748 million), an increase of 4% compared to RMB47,112 million in the same quarter of 2022.
Free cash flow, was RMB45,220 million (US$6,198 million), an increase of 27% compared to RMB35,709 million in the same quarter of 2022.
Of Alibaba's major segments, Cainiao, Digital Media, Local Services Group and Alibaba International Digital Group grew much faster than the Cloud Intelligence Group and the Taobao and Tmall Group. The slower growth of the cloud business and China e-commerce business is widely expected by the analysts.
Revenue for the Taobao and Tmall Group grew 4% to RMB97.7 billion. The company explained that “customer management revenue increased by 3% to RMB68.7 billion, primarily due to the increase in merchants' willingness to invest in advertising, partly offset by the modest decline in Taobao and Tmall online pay GMV.”
While Pinduoduo Holdings (PDD, Financial) has not reported their earnings results, it is almost certain that PDD's e-commerce growth rate will be much higher than Alibaba. However, it looks like at least Alibaba's management team has finally realized that putting users first is the most important thing. This is a positive sign. To achieve the goal, CEO Eddie Wu said that they “will adopt user purchase frequency as the highest priority KPI for platform operations, above GMV as purchase frequency is the most direct measure of users' recognition of an Internet consumption platform.” In my opinion, whether Alibaba will be successful or not depends on their own execution as well as PDD's reaction. It's too early to tell. But they are moving in the right direction.
The slow growth of the Cloud business is totally expected because the company has previous said they would proactively manage the quality of cloud revenue to achieve enhanced profitability. This means they would have to give up unprofitable clients and projects. To management's credit, this is exactly what they did this quarter. CEO Eddie Wu promised that “going forward, we will be selective about all of our products and business models. We will reduce project-based revenue exposure, invest more in core products for public cloud and continue to enhance the cloud businesses' revenue quality.” It looks like it will be a few quarters before revenue growth rate picks up again for the cloud business. But at the same time, profitability is likely to continue to improve.
Overall, Alibaba's quarterly result is neither bad nor great, but it seems like management team is willing to move in the right direction.
The bad news
Obviously, the stock was down more than 9% not because of the earnings results. Alibaba shocked investors with the cancellation of the spin-off of its cloud business and with Jack Ma's sale of the stock at this level of valuation. This is a really bad sign.
In my previous article Alibaba: A Sinking Ship. I wrote the following words:
“Alibaba's culture problem is much more than just being bureaucratic. Since Ma passed the baton to Daniel Zhang, fewer and fewer employees still believe in Ma's vision, and there are constant internal fights among the partners and top management team. To some extent, Alibaba is facing a cultural crisis. This is one of the reasons why Tsai returned as Alibaba's chairman. Tsai is a very capable manager, but given his age and facing multiple formidable and younger competitors, I do not know if there is much he can do to turn around the morale and culture.”
In my opinion, the cancellation of the spin-off of the cloud business and Jack Ma's sale of the stock are both clear signs that the internal fight has escalated. Jack Ma is clearly upset. This is worrisome because it will further hurt an already weak morale. I think the No.1 priority for Alibaba's board and management team should be figuring out how to balance the interests of major shareholders and management team. If this problem doesn't get solved, there will be more unpleasant news in the future.
Conclusion
Operationally and financially, Alibaba had a satisfactory quarter. However, the cancellation of the spin-off of the cloud business and Jack Ma's sale of Alibaba's stock are both warning signs of further chaos. After the sell-off, Alibaba is even cheaper. However, I remain skeptical of Alibaba's turnaround plan. We will see how the company progresses in the next few quarters.
