Alibaba (BABA, Financial) experienced a disappointing earnings miss for the second consecutive quarter in Q4 (March), despite its aggressive stock repurchases and accelerating revenue growth. This led to profit-taking today. The company's stock had risen over 20% since April after hitting its 2024 lows, boosted by its emerging leadership in AI, especially in the public sector. However, high expectations set before the Q4 report contributed to a sharp pullback today.
The earnings miss primarily stemmed from Alibaba's domestic e-commerce platforms, Taobao and Tmall. Despite a double-digit increase in gross merchandise volume (GMV), customer management revenue (CMR) only grew by 5% year-over-year. CMR, which includes marketing and other merchant services, typically has high margins. The slower growth in CMR compared to GMV indicates a lag in profitability, exacerbated by the gradual rollout of new monetization products with lower yields. Management remains hopeful that CMR growth will align with GMV in future quarters.
Internationally, Alibaba is enhancing its e-commerce presence to compete with Pinduoduo (PDD, Financial), which has successfully marketed Temu in Western markets. Alibaba's AE Choice is designed as a counterpart to Temu, but profitability from this switch will take time to materialize, thus widening the margin gap.
Additionally, Alibaba’s Cloud Intelligence Group saw minimal revenue growth of 3% year-over-year in Q4, continuing the trend from previous quarters. Despite halting its Cloud IPO plans, the company is focusing on high-quality revenue streams from public cloud adoption and reducing low-margin project-based contracts. The core public cloud services are showing promising double-digit revenue growth, which is expected to enhance future revenues significantly.
While AI demonstrated strong demand with triple-digit revenue growth in Q4, it did not significantly impact overall revenue. Nevertheless, Alibaba is investing heavily in AI and traditional cloud computing infrastructure to meet growing customer demands.
Looking forward, Alibaba expects GMV for Taobao and Tmall to return to healthier growth rates in FY25. The company remains focused on long-term demand generation in its overseas e-commerce ventures and anticipates a return to double-digit growth in cloud revenue by the second half of FY25.
Despite these strategic investments, Alibaba’s profitability was impacted in Q4. Given the company’s recent challenges, both internal and external, Alibaba remains a cautious investment, likely to exhibit sideways trading until profitability and revenue growth show clear signs of improvement.
