Alibaba's first quarter revenue increased by 4% to $33.5bn, falling short of analyst estimates. Sales from within Chinese commerce fell 1%, with strong growth in wholesale revenue unable to offset a 9% decline in direct sales to Chinese consumers. Growth in the Cloud Intelligence Group picked up a little to 6%.
The group’s favoured measure of operating profits adjusted EBITA fell 1% to $6.2bn. Profit growth of 155% by Cloud Intelligence was not enough to offset a hefty increase the loss from International Digital Commerce, which was driven by increased investments in AliExpress and the fashion platform Trendyol.
Free cash flow more than halved to $2.4bn largely because of higher spending on cloud infrastructure. Net cash came in at $55.8bn.
The group repurchased $5.8bn of its own shares, with $1.2bn funded by the issuance of convertible bonds.
The shares were down 2.8% in pre-market trading.
Our view
Alibaba is China's largest e-commerce business. But it’s battling both with a shaky Chinese economy and increasing competition. Efforts to attract and retain higher value customers have attracted over 42 million customers to the 88VIP club but retail is still struggling with direct sales down 9% in the quarter and orders fulfilled on behalf of other merchants up just 1%.
The Chinese giant is responsible for multiple businesses across e-commerce, digital media and entertainment, logistics and cloud computing, to name just a few.
It also houses the impressive AliExpress, which connects global consumers to a vast marketplace, where they can buy directly from manufacturers all over the world. We think the international markets represent an exciting opportunity for the group. It's been doubling down efforts to expand in South Asia, an area with good growth potential. Growth in the international unit has been impressive but it’s come at the cost of heavy losses. Until a path to profitability in overseas markets is clear it’s hard to get too excited.
Alibaba is also looking to carve out a niche in the fast-growing world of cloud-computing. There hasn’t been a high-octane lift off. But growth is picking up and the unit has started making profits. There’s also been a substantial expansion in the number of users paying for Alibaba Cloud’s Artificial Intelligence platform and there is an opportunity for the group to become a regional powerhouse in this rapidly evolving area. However, the unit is burning cash at breakneck speed. Growth is going to have to accelerate considerably before shareholders can be assured that this is a good use of their money.
With that in mind it’s a good thing that the business remains cash rich and cash generative, enough for Alibaba to make generous returns to shareholders in the form of share buybacks. However, there can be no guarantee of further payouts particularly if cash flows don’t start moving back in the right direction.
If international expansion efforts and cloud computing take off at the required speed, Alibaba could unlock enormous growth, but that remains a very big 'if'. It's still dwarfed by the struggling Chinese operations, which we think will be a bigger driver of sentiment in the short-term. So far progress has been slower than hoped for, reflected in a valuation well below the long-term average. This also suggests disappointment in failed attempts to spin off parts of the company through separate IPOs. With that distraction seemingly off the table markets are free to fully focus on business performance, which for now is a little underwhelming. If management can turn things around shareholders are likely to be rewarded for their patience but there remains a lot of execution risk ahead.
Environmental, social and governance 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 average. 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 Refinitiv, 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 Refinitiv. 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.
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