- Revenue growth exceeds expectations
- Profitability suffers on marketing and investments
- Less money for more growth compared to US "hyperscalers"
- Will AI and Cloud outgrow compensate core business under-performance?
- Revenue growth exceeds expectations
- Profitability suffers on marketing and investments
- Less money for more growth compared to US "hyperscalers"
- Will AI and Cloud outgrow compensate core business under-performance?
Alibaba, much like Amazon, has been a powerhouse in e-commerce for most of its operations. However, in recent quarters, both companies are increasingly associated with AI and Cloud by investors, even though their core business remains primarily online sales. Alibaba, known as the "Chinese Amazon," released results yesterday that the market received with enthusiasm. The company is up over 4% before the opening of trading on the American stock exchange.
This is particularly significant in recent weeks, as sentiment regarding AI and tech companies has significantly worsened, so it's worth examining how Alibaba's strategy is enticing investors.
- Revenue surprised positively at 247 billion yuan compared to expectations of 243 billion. This is a year-over-year increase of 5%, with a "comparable sales" growth of as much as 15%.
- However, the company failed to meet expectations regarding EPS, which turned out to be significantly lower than the expected ~5.7, at 4.36. Operating profit fell by as much as 85%, and adjusted EBITDA dropped by 78%.
The disappointment regarding the company's profitability stems from two main factors. Firstly, the company, being one of the driving forces in China's race for AI, is investing huge amounts of money in infrastructure and research. Based on cash flows, the increase in AI spending can be estimated at over 85%. Another contributor to the relatively weak profit is marketing and sales costs. The company is conducting an intensive marketing campaign, enhancing customer experience quality, and a subsidy system aimed at capturing a larger market share.
However, revenue should not be considered only in terms of total size. Where Alibaba gains significant advantage over Amazon, which is the most comparable company from the USA, is the growth rate of revenues and profits from Cloud and AI, especially when considering incurred costs.
Alibaba's Cloud Intelligence revenues increased by 34%, adjusted EBITA rose by 35%, while maintaining a margin of 35%. A positive aspect for the company is that despite significantly lower capital expenditures on investments and financial burdens undertaken by the company, it achieves growth in the segment faster than Amazon does. Where Alibaba falls short is in "core" operations - the Chinese giant achieves significantly lower margins and revenues from operational activities, which means that in case of failure or delays in the cloud and AI segment, it lacks a safety buffer.
Despite some darker spots in the company's results report, investors seem to be giving Alibaba and their strategy another vote of confidence.
BABA.US (D1)
Source: xStation5
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