Alibaba Group Holding Ltd. (BABA, Financial) announced its financial results for the third quarter of 2024 on Feb. 7. Earnings beat estimates and the company announced another $25 billion share buyback program on top of the previously announced $50 billion share repurchase program. Alibaba's shares fell 6% after reporting results.
CEO Eddie Wu seemed to be very pleased with the quarterly results. In the earnings release, he said the following:
“We delivered a solid quarter as we are executing our focused strategies across the organization. Our top priority is to reignite the growth of our core businesses, e-commerce and cloud computing. We will step up investment to improve users' core experiences to drive growth in Taobao and Tmall Group and strengthen market leadership in the coming year. We will also focus our resources on developing public cloud products and sustaining the strong growth momentum in international commerce business.”
Obviously investors did not agree with him.
Earnings summary
For the quarter, Alibaba's revenue increased 5% year over year and adjusted Ebitda grew 2%. Non-GAAP net income decreased 4% year over year, while net cash provided by operating activities declined 26% and free cash flow fell 31%. From a financial standpoint, the quality of Alibaba's revenue growth this quarter was very low because profitability declined.
Segment results
Alibaba's segment results are as follows:
On a segment basis, the International commerce retail business was the best-performing unit with an impressive 56% growth rate year over year. According to the press release, the sales increase was the result of solid combined order growth in AIDC's retail businesses, "driven by the strong performance of all its major retail platforms, the revenue contribution from AliExpress Choice as well as improvements in monetization.”Although the AIDC segment's growth has been strong, it has yet to make money because of continued investments in the business.
The Cainiao Smart Logistics segment also experienced healthy revenue growth of 24% year over year, which was attribued to a sales increase from cross-border fulfillment solutions. On top of the healthy revenue growth, Cainiao has finally started making profits for Alibaba due to cost-optimization efforts and economy of scale. During the quarter, Cainiao's adjusted Ebita was 961 million yuan ($135.03 million), compared to a loss of 12 million yuan in the same quarter last year. This is certainly good news for the company.
Revenue from the cloud business grew 3% year over year. However, excluding Alibaba-consolidated businesses, the revenue for the cloud business actually decreased year over year because the company continued to cut low-margin project-based contracts. On the other hand, revenue from public cloud products and services recorded healthy growth.Overall, revenue from Alibaba's cloud business was in line with expectations.
Turning to Aliaba's most important business, the Taobao and TMall Group, revenue growth was only 2% for the quarter. Worse yet, the higher-margin customer management or the ads commission business was flat compared to last year. Although order volume and gross merchandise volume grew during the quarter, both average order value and take rate declined. I will note here that Taobao and TMall Group's revenue growth was slower than China's retail growth during the same period. This tells me both Taobao and TMall Group are still rapidly losing market share to Pinduoduo (PDD, Financial) and Bytedance's Douyin even though management has taken dramatic steps to address the competition issue. I think this is the key issue for Alibaba.
Alibaba's management outlined the strategy to turn around the business, which is in line with the previously announced strategy:
“We are in the process of revitalizing Taobao and Tmall Group and positioning it for future growth. Our growth strategy is to put users first, build ecosystem for brands and merchants to thrive on our platform, and realize technology-driven innovation. We are committed to building an e-commerce ecosystem where brands, merchants and manufacturers operate with high efficiency, thereby providing multi-tiered Chinese consumers with good products and services at attractive prices. In December 2023, we appointed a new management team to execute Taobao and Tmall Group's strategy and drive business growth through technological innovation.”
The problem with the strategy is it does not address the company's core competitive disadvantage against Pinduoduo, which is its cost disadvantage and its centralized merchants system. So far, management has not done enough to address these two disadvantages.
Thoughts on Alibaba's share buyback program
Along with the earnings release, Alibaba announced another $25 billion share buyback program on top of the previously announced $50 billion repurchase program. The company's massive share buyback program is the largest among Chinese tech companies and one of the largest share buyback programs ever announced of all public companies. While I applaud management's efforts, I think the company should think about paying more dividends to shareholders as opposed to merely increasing share buybacks because Alibaba's intrinsic value may decline in the future. If its intrinsic value does decline in the future, a cash dividend is a better option for shareholders compared to share repurchases.
Conclusion
Alibaba's international and logistic businesses have experienced healthy growth for the past several quarters. Its cloud business is gradually recovering from the price war in the low-margin segment. However, its core China e-commerce business is still in trouble and there has been no clear sign of a turnaround. Without signs of improvement, it is not clear whether Alibaba is undervalued or not.
