Alibaba (HKG: 9988) / (NYSE: BABA) reached a high of US$124 in January 2023 before falling below US$90 recently as positive sentiments faded. Alibaba also announced a major restructuring of its business into the following 6 business groups
- Cloud Intelligence Group (Cloud, AI, DingTalk and other businesses)
- Taobao & Tmall Group (including Taobao, Tmall, Taobao Deals, Taocaicai, 1688.com and other businesses)
- Local Services Group (including Amap, Ele.me and other businesses)
- Alibaba International Digital Commerce Group (including Lazada, AliExpress, Trendyol, Daraz, Alibaba.com and other businesses)
- Cainiao Smart Logistics Network Limited
- Digital Media and Entertainment Group (including Youku, Alibaba Pictures and other businesses)
Alibaba announced that it will explore seeking external financing for Alibaba International Digital Commerce Business Group, explore an IPO for Cainiao Smart Logistics Group and execution of an IPO for Freshippo.
Alibaba will also seek to allow full independence for its Cloud Intelligence Group in the next 12 months. This will be done by a full spin-off of the Cloud Intelligence Group via a stock dividend distribution to shareholders, with intention for it to become an independent publicly listed company.
Here we analyze Alibaba’s 4QFY23’s results to understand if Michael Burry of The Big Short recent doubling of his position in Alibaba from last quarter makes sense.
Read about Alibaba’s latest 1Q24 earnings here
Alibaba’s FY23 financial results
| P&L in RMB’m | FY23 | FY22 | Mar’23 | Dec’22 | Mar’22 | Variance (%) | Variance (%) |
| EPS in RMB’$ | FY23 vs FY22 | Mar’23 vs Mar’22 | |||||
| Revenue | 868,687 | 853,062 | 208,200 | 247,756 | 204,052 | 1.8% | 2.0% |
| Income (loss) from operations | 100,351 | 69,638 | 15,240 | 35,061 | 16,717 | 44.1% | -8.8% |
| Adjusted EBITDA | 175,710 | 158,205 | 32,123 | 59,162 | 23,373 | 11.1% | 37.4% |
| Adjusted EBITDA margin | 20% | 19% | 15% | 24% | 11% | 5.3% | 36.4% |
| Earnings per HK share | 3.43 | 2.84 | 1.12 | 2.24 | -0.76 | 20.8% | N.M. |
| Non-GAAP earnings per HK share | 6.82 | 6.59 | 1.34 | 2.41 | 0.99 | 3.5% | 35.4% |
Alibaba’s share price went up by a negligible 3% as market awaits Alibaba’s next moves from its recently announced restructuring plans.
Looking at its financial results, Alibaba delivered YoY growth in revenue from both a FY23 and 4QFY23 perspective. FY23 recorded higher income from operations as well as higher EBITDA margins and earnings per share.
4QFY23 income from operations fell short when compared to 4QFY22’s results. Adjusted EBITDA was 37.4% higher at RMB 32.1 billion as there were higher write-offs in 4QFY22.
On a segmental basis, higher revenues were recorded in the international commerce and Cainiao segments, marking another quarter of continued growth.
China commerce and AliCloud both saw declines of low single digit percentages. For AliCloud, this is noteworthy as the segment has fallen from being one of the growth stars,
Its 6 segments recorded improved EBITA performance on a YoY basis. Comparing to 3Q23, almost all segments recorded lower EBITA. This is mainly due to seasonality of the business and some one-off expenses in the international commerce segment.
The only segment that recorded a QoQ EBITA increase was the Cloud Segment as monetization improved. This was despite a decrease in revenue of the Cloud segment due to delays in delivery of hybrid cloud projects given the COVID-19 resurgence in January and normalization of CDN demand compared to the same period last year, as well as the impact from Bytedance phasing out the usage of Alibaba’s overseas cloud services for its international business due to political reasons.
2 Positive takeaways
1) Continued revenue growth in the international e-commerce segment
The increase in revenue was from Trendyol resulted from more efficient use of subsidies and robust YoY order growth. Increase in revenue contributed by Lazada was the result of continuous improvement in monetization rate by offering more value-added services.
Moving ahead, the international commerce will focus on growing cross border B2C business. In the B2B wholesale sector, it has plans to expand into more markets.
Adjusted EBITA margins also improved significantly YoY as 4Q23 recorded -8% loss vs -15% a year ago.
2) Cainiao’s international expansion continues to do well
Cainiao is probably the segment with the best working strategy. For 4Q23, Cainiao’s revenue grew 18% YoY with 72% generated from external customers.
This was primarily contributed increasing revenue per order from international fulfillment solution services as well as increasing demand for consumer logistics services.
Cainiao continues to expand its international logistics network by strengthening its end-to-end logistics capabilities, including eHubs, line-haul, sorting centers and last-mile network.
In China, Cainiao continues to expand its Cainiao Post network that offers a variety of value-added services. During the quarter, Cainiao Post further increased its penetration of door-step parcel delivery service to customers, with door-step delivery parcels increasing by approximately 85% year-over-year.
2 Negative Takeaways
1) GMV and revenue decline in China e-commerce
4Q23’s Revenue declined by 3% YoY, resulting in a FY23 decline of 1%.
4Q23’s online physical goods GMV generated on Taobao and Tmall, declined mid-single-digit percentages YoY. China’s consumption gradually recovered throughout the quarter. In the month of March, online physical goods GMV growth on Taobao and Tmall, turned positive, driven by strong growth of fashion & accessories and healthcare categories.
Overall GMV was negatively affected by the COVID-19 disruption in January and seasonal volatility from an earlier Chinese New Year, as well as normalizing grocery demand due to decrease in consumer hoarding behavior post-COVID-19.
Due to the continued severe competition from various big players, Alibaba’s China e-commerce segment will focus on acquisition and retention of high quality users as well as creation of new demand from supply side innovation.
2) Sequential revenue decline in Cloud
Alibaba’s cloud segment saw revenues declined another quarter, this time significantly, from RMB 20.2 billion in 3Q23 to RMB 18.6 billion in 4Q23.
This continued revenue decline goes a long way in explaining why Alibaba intends to spin off Alicloud and allow for AliCloud to be fully independent.
Alibaba believe this will provide the segment with the right structure to fully capitalize on the progress in industrial digitalization and emergence for AI which has created high demand for computing power.
Where is Alibaba heading?
Alibaba’s strength and weaknesses have not changed since the last quarter. The international commerce and Cainiao segments are still the better performers while the Cloud and China commerce segments seem to be getting weaker each quarter.
Looking ahead, Alibaba believes that the restructuring will allow each segment to focus on driving growth amid the competitive landscape, and creating sustainable, long term value for the Alibaba Group shareholders.
We recognise that the new organizational and governance structure will improve the degree of perceived and actual independence of each segment, allowing for the segment to make certain strategic moves. This will benefit some segments more than others.
At this point in time, we believe Alibaba sees this as an overall benefit as the ability to unlock the full potential of its flywheel could have fundamentally switched since the tech regulatory crackdowns.
Alibaba has also explained that with the restructuring, it will be able to better manage capital and generate more returns for investors. In this vein, for 4QFY23, Alibaba repurchased another 21.5 million ADSs for approximately US$1.9 billion under its US$40 billion share repurchase program, leaving approximately US$19.4 billion remaining under the current authorization, effective through March 2025.
From an operational perspective, 3QFY23 marked the turnaround but it is clear from 4QFY23’s results that growth is still tepid. Although it is likely an overall benefit, we do not see signs that the restructuring plans will bring the company back on the same growth trajectory as before.
Michael Burry doubling his position could be from a value stock perspective and hence the upside could be more limited than we think.
