Alibaba's Q2 2024 Performance: Can the E-commerce Giant Turn Challenges into a Comeback Story?

It seems that Alibaba has yet to fully recover from the challenges of last year's transformation.

Aug 23, 2024

On August 15, Alibaba Group released its financial report for the first quarter of FY 2025 (i.e., Q2 2024), revealing several key financial metrics that were lackluster and even fell below expectations. The group's core revenue driver, Taobao and Tmall(Taotian) Group, saw an overall decline in revenue, marking its lowest performance since the pandemic's impact. This suggests that Alibaba has yet to fully recover from the challenges of last year's transformation. Therefore, is Alibaba still worthy of investors' trust at this point?

Revenue Growth Amidst Profit Declines and Segment Challenges

According to the data disclosed by Alibaba, the company reported total revenue of RMB 243.24 billion (approximately USD 33.47 billion) for the last quarter, reflecting a 4% year-over-year increase. This growth was primarily driven by the cloud computing and international digital commerce businesses. However, overall, it slightly missed market expectations. The gross profit was approximately USD 13.37 billion, while operating income dropped by 15% to around USD 4.95 billion. With the added impact of increased investment impairments, net profit for the quarter was approximately USD 3.3 billion, a 27% year-over-year decrease, accounting for only 10% of total revenue. Additionally, free cash flow plummeted by 56% to about USD 2.39 billion, mainly due to increased capital expenditures related to Alibaba Cloud infrastructure and reduced revenue from direct sales businesses.

Among Alibaba's six major revenue segments, Taotian remains the core, contributing about 47% of total revenue. However, due to weak performance in its direct sales business this quarter, Taotian's revenue declined by 1%, which is a concerning signal for the overall valuation. Notably, revenue from China's retail business dropped by 2%, with direct sales declining by 9% and customer management revenue growing by only 1%, far below market expectations. Alibaba's short-term profitability was impacted by several factors, including a deliberate reduction in revenue as part of the 'price war' during the annual online shopping festival on June 18 in China, the control of merchant fees, and high management expenses.

How Did the Capital Markets React?

Despite Alibaba's relatively low net income margins, the company's overall financial performance was not far below market expectations. Financial institutions such as JPMorgan, Citibank, and Daiwa Securities have all maintained a "buy" rating on the company due to its solid fundamental performance.

On the day Alibaba released its earnings, its stock opened lower on the U.S. market but showed resilience by closing slightly higher. The positive momentum continued the next day, with the stock price surging by over 4.5%. The market reacted positively to Alibaba's earnings per share (EPS) of $2.29, which exceeded expectations by $0.20. This better-than-expected EPS was largely attributed to Alibaba's aggressive share repurchase Program. In the first and second quarters, Alibaba spent $4.8 billion and $5.8 billion to repurchase a total of 1.137 billion ordinary shares, significantly enhancing shareholder returns.

As of Wednesday, August 21, Alibaba's stock price had risen by 3% since the company announced its fiscal year 2024 financial report in May. This represents a 4% increase compared to the beginning of the year, while the S&P 500 index has risen by more than 13%.

E-commerce Competitive Landscape: Has Alibaba Moved from "Leader" to "Challenger"?

Three years ago, Pinduoduo, a major Chinese e-commerce company, had a market value that was less than a quarter of Alibaba's. However, after experiencing rapid growth and following the latest Q3 earnings report released in November, Pinduoduo surpassed Alibaba to become the most valuable e-commerce company in China. This leading position has been maintained, with Pinduoduo surpassing Alibaba again this year. Alibaba's price-to-earnings (PE) ratio is currently at 17 times, which is relatively low compared to its historical range over the past decade. In May, the market capitalisation difference between the two companies reached as much as $20 billion. As of now, the market values of both Pinduoduo and Alibaba fluctuate around $200 billion, with JD.com, the third-largest player in the sector, lagging behind with a valuation of only about one-fifth of the top two.

Pinduoduo's success in outperforming Alibaba is evident not only in its revenue but also in its profitability. Despite Alibaba's revenue being 2.5 times that of Pinduoduo in the first quarter, Pinduoduo's non-GAAP profit exceeded 80% of Alibaba's. As a newcomer to the market in 2015, Pinduoduo has demonstrated remarkable efficiency in management and cost control, achieving an impressive 202% growth in non-GAAP profit in Q1. With its Pinduoduo platform in China and the cross-border e-commerce platform Temu, the company has become the most profitable e-commerce business. While there is still a revenue gap compared to other major players, Pinduoduo's revenue grew by 131% in Q1. Wall Street analysts anticipate a similar revenue growth rate for Q2, with the earnings report set to be released next Monday, August 26.

In contrast, Alibaba's revenue growth rates for Q1 and Q2 were only 7% and 4%, respectively. On the one hand, Alibaba's large revenue base inherently makes it challenging to achieve high growth rates. On the other hand, this is a result of Alibaba's deliberate strategic choices, including adjusting its direct sales business and a conscious decision to lower revenue to maintain GMV growth in the high single digits.

Is Alibaba Still Worth Investors' trust?

The answer is pretty clear: YES!

There are several indicators that support this perspective. To begin with, Alibaba has committed to implementing improved monetization strategies in response to the steady growth in GMV (Gross Merchandise Volume) within the Taotian Group. This effort includes the introduction of new advertising tools, such as the 'Quanzhan Tuiguang' feature launched in April, as well as the implementation of software service fees. For example, beginning in September, Alibaba intends to levy a 0.6% technology service fee on the GMV received by merchants on the Taotian platform, which will allow the company to translate substantial GMV growth into revenue, bringing the growth rate of Customer Management Revenue (CMR) more in line with GMV growth.

"Moreover, Alibaba's third-quarter revenue growth is expected to benefit from two main drivers: the revitalised Alibaba Cloud Intelligence Group and the diversified International E-commerce Group. The former saw its AI-related products achieve triple-digit year-on-year revenue growth in Q2, with adjusted EBITA increasing by 155%. The group's advancements in AI have rejuvenated Alibaba Cloud's overall performance, leading to a 6% growth last quarter. It is anticipated that double-digit percentage growth will be achieved in the second half of FY 2025. Meanwhile, Alibaba's International Digital Commerce Group (AIDC), which includes platforms like Lazada and Aliexpress, reported a 32% year-on-year growth despite operating at a loss. Alibaba's leadership expects this segment to break even within 1-2 years. As competition intensifies in China's e-commerce market due to emerging forces like short videos and live streaming, expanding and diversifying internationally has become a key focus for revenue growth.

Furthermore, Alibaba's current valuation is lower than its historical average. The company has committed to a $25 billion share repurchase program by 2027, which could provide additional returns to investors given the present lower valuation. For long-term investors who have confidence in Alibaba's growth trajectory, now could present an appealing entry point. Additionally, Alibaba was scheduled to become a dual-listed company on both the HKEX and NYSE on August 28. If Alibaba is included in the Shanghai-Hong Kong Stock Connect, it could stabilise the proportion of Southbound funds holding Alibaba shares at above 10% in the long term, offering significant support to its market value.

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