After squatting for too long, can Alibaba still jump?

Although the stock price performance has been lukewarm, it has always been a focal point of market attention and a key target recommended by sellers. Today, Alibaba ($ Alibaba.US) and BABA-W.HK announced their second quarterly report for the fiscal year 2025. How did the performance turn out? Here are the views from Dolphin Investment Research:

1. Shareholder returns remain in the first tier

According to the company's disclosure, Alibaba repurchased a total of $4.1 billion in shares during the quarter ending in September, resulting in a 2.1% reduction in total share capital this quarter. Although this is a slight decrease compared to the average of over $5 billion in the first half of the year, it can be understood given the rise in stock prices in late September. A stable repurchase volume of approximately $4 to $5 billion per quarter corresponds to Alibaba's market value of less than 220 billion, yielding at least an 8% return rate. This does not even consider the potential additional dividend returns. Compared to other Chinese concept companies (which have also seen significant increases recently), Alibaba stands out in terms of repurchase efforts in the third quarter.

2. Taobao is still the biggest "burden" for the family

The core of Alibaba Group—Taobao, saw its domestic retail customer management revenue (CMR) grow by 2.5% year-on-year this quarter, an improvement from 0.6% in the previous quarter, but still lagging behind the average consensus expectation of 3.3%. The performance is not considered good.

In terms of performance trends, the previously consistent pattern of order growth > GMV growth > revenue growth > profit growth has shown some changes, with the growth difference between CMR and GMV nearly approaching zero this quarter. Although the company did not disclose GMV growth this season, it clearly stated that the take rate has stabilized year-on-year. Coupled with the implementation of a 0.6% technical service fee and a site-wide advertising tool in early September, the positive effects released in the third quarter of the calendar year are limited. As these two new measures gradually take effect, it is highly likely that the growth difference between CMR and GMV will continue to narrow until CMR growth surpasses GMV growth.

If the improvement in CMR growth trends can somewhat offset the weaker-than-expected performance, there is no room for compensation in terms of profit. The adj. EBITA of the Taobao Group decreased by approximately 5.3% year-on-year this quarter, with the decline widening from 1% in the previous quarter, and the actual profit also falling short of expectations by about 3%. This leaves no room for any compensation. Combined with other data, the significant increase in marketing expenses is likely the main reason dragging down Taobao's profits. 3. Alibaba Cloud Increases Revenue and Profit, Steadily Approaching Expected Goals

Alibaba Cloud, the second most important segment of the group, has struggled with single-digit revenue growth over the past two fiscal years, which is the biggest issue for this business. However, management announced at the beginning of the year that the growth rate of cloud services would rise to double digits in the second half of the year. This quarter, Alibaba Cloud achieved revenue of 29.6 billion, with a year-on-year growth rate of 7.1%, continuing to improve from last quarter's 5.7% (but did not beat expectations). According to the company, the recovery in growth is mainly driven by the double-digit growth of the public cloud business (with contributions from AI), partially offset by the private cloud.

From a profit perspective, this quarter Alibaba Cloud's adjusted EBITA profit reached 2.66 billion, exceeding expectations by 21%. The adjusted EBITA profit margin increased by another 0.2 percentage points quarter-on-quarter, and the trend of profit improvement remains unchanged. Although there is still some distance from double-digit growth, the simultaneous increase in revenue growth and profit margin this quarter will undoubtedly further strengthen market confidence in the continued recovery of the cloud business.

4. International E-commerce "Quietly Making Money," Prioritizing Loss Reduction

The international e-commerce segment, which has reached the second largest revenue scale in the group, continued the trend of more refined operations this quarter. Although the year-on-year growth trend slightly slowed to 29% due to a significantly raised base, it still exceeded expectations by 1.5 percentage points. The growth rates for international retail and international wholesale businesses were 35% and 9.4%, respectively, both slowing by 3-4 percentage points compared to last quarter, with a similar pace.

Corresponding to the slowdown in growth, the losses in the international segment continued to narrow this quarter. The adjusted EBITA loss decreased from 3.7 billion last quarter to 2.9 billion, which is better than expected. The loss rate also narrowed from -12.7% to -9.2%. With increasing regulatory risks in cross-border business, suitable for quietly making money, and local Southeast Asian e-commerce choosing to focus on profits, the international business is likely to maintain a trend of "high-quality" growth and prioritize loss reduction in the future.

5. Profit Returns to Zero, Cainiao Takes on Heavy Investments

Cainiao, which is highly tied to overseas business development, saw its year-on-year revenue growth decline from 15.7% to 8% this quarter, alongside the slowdown in international business. However, due to the high capital expenditures required for cross-border logistics, Cainiao, which was profitable last quarter, saw its adjusted EBITA significantly narrow to only 60 million this quarter, far below expectations. If we look at the combined losses of international e-commerce and Cainiao, the total loss narrowed by only about 200-300 million quarter-on-quarter, indicating that the combined loss reduction is not satisfactory. It can only be said that the heavy asset investments are all borne by Cainiao.

6. Local Life Services Also Prioritize Loss Reduction

Alibaba's local services revenue grew by 13.9% this quarter, slightly accelerating, but the market expected a growth rate as high as 24%, resulting in a significant miss. However, the market expected a loss of 920 million, but the actual loss was only 390 million. Unlike the market's expectation of high investment, high growth, and high losses in expansion, the actual approach taken is one of steady growth and loss reduction, which is not a bad choice 7. The process of loss reduction for pan-entertainment and "N" companies has paused: The big entertainment sector lost 180 million this quarter, higher than last quarter's loss of 100 million, and also above market expectations. Meanwhile, the overall loss for "N" companies was 1.58 billion, which, while in line with market expectations, has also expanded compared to last quarter's 1.26 billion. It seems that the investment intensity has increased again?

8. The sharp increase in expenses is the biggest culprit for the decline in group profits

From a profit perspective, TaoTian Group's profit was below expectations (missed by about 1.3 billion), offset by the continued improvement in profits from Alibaba Cloud and the refined operations of the local life business, where losses were less than expected. Overall, the group's profit indicators are generally in line with expectations. However, from a trend perspective, the group's overall adjusted EBITA profit margin also fell from 18.5% last quarter to 17.2%. Last quarter, all businesses except TaoTian exceeded expectations in reducing losses/increasing profits, leading to a significant improvement in the group's profit margin, which did not continue this quarter.

The reason for this is that marketing expenses (excluding SBC) increased by nearly 30% year-on-year (compared to 19% last quarter), with about 9% more spent than market expectations. Meanwhile, management and R&D expenses increased by 10% to 11% year-on-year, although the increase is not as exaggerated as marketing expenses, the expense ratio is still expanding compared to the only 5% growth in revenue. This indicates that the significant increase in spending is the main reason for the decline in profit margins this quarter.

Dolphin Investment Research Opinion:

Overall, Dolphin Investment Research's view on Alibaba's performance this time is somewhat negative. Firstly, the key TaoTian business, although the CMR growth rate has marginally improved, still has an absolute growth rate of 2.5%, which is considered a "low single-digit range" and is below expectations, thus not good. A more serious issue is that the year-on-year decline in profit amount has expanded, and the profit margin is also declining. The market has always had concerns about whether the previous GMV growth recovery of TaoTian was achieved through subsidies. The fact that TaoTian's profits have declined year-on-year for two consecutive quarters, with an expanding decline, has not alleviated but rather worsened these concerns. Therefore, summarizing TaoTian's performance with the word "weak" is not an exaggeration.

For the second and third places, only Alibaba Cloud, which has accelerated revenue growth and improved profit margins, still has commendable performance and a market outlook worth expecting. The international e-commerce and Cainiao symbiotic brothers have seen a slowdown in revenue growth, and their combined losses have not narrowed significantly. Although the loss rate of the international e-commerce segment alone is decreasing, this comes at the cost of the brother company bearing the logistics asset investment, which does not look good when viewed collectively.

As for other less significant businesses, last quarter's bright spot was that the loss rates of these "relatively marginal" businesses had significantly narrowed both in terms of poor expectations and sequential trends. However, this quarter, the loss amount for local life remained flat sequentially, while the losses for the big entertainment sector and "N" companies slightly expanded sequentially Combined with cost data, it seems there is a possibility of reinvestment, leading to an increase in losses. The benefits of the "relatively marginal" business rapidly reducing losses have also (temporarily) disappeared.

From the perspective of current performance, Alibaba's performance can only be described as "weaker than expected." Currently, Dolphin Investment Research's attitude towards Alibaba's investment value remains: relying on high buybacks to support the valuation floor while hoping that government consumption stimulus and the strengthening of Taobao's monetization can slightly recover in the future.

Looking downward, the buyback has brought Alibaba at least an 8% return rate, ranking it among the top tier of all Chinese assets, which is enough to provide Alibaba with very solid bottom support.

In terms of funding or event catalysts, the previously anticipated benefit of Alibaba's dual primary listing in Hong Kong and inclusion in the Hong Kong Stock Connect has already materialized. Although the process of southbound funds or passive index funds allocating to Alibaba may not have been completed, from an expectation perspective, this benefit is now completely in the past. The remaining potential event catalyst is the rumored re-listing of Ant Group. However, unlike the previous situation where Alibaba's inclusion was just a matter of time, whether Ant will re-list remains an "illusion," and investors should not have excessive expectations.

Fundamentally, after several quarters of adjustment, the most critical Taobao business has not yet shown any real signs of improvement (for example, a significant increase in CMR, with profits at least stopping the decline to match revenue growth). The 0.6% technical service fee and the full-site advertising tools implemented by Taobao in early September are said to require at least about six months to take effect on the monetization rate. Whether Taobao's performance will truly improve in the future, Dolphin can only say there is a possibility of improvement, but in the current macro and industry competitive environment, there is still insufficient evidence to support a confident optimistic judgment. In summary, hold the bottom line first, and then "imagine" possible reversal opportunities.

The following is a detailed performance analysis:

I. New Reporting Standards for Alibaba's Financial Reports

Starting in June 2023, Alibaba Group has significantly adjusted the reporting standards for its financial disclosures. Below are the latest reporting standards for better understanding of subsequent analyses:

Taobao Group: Taobao, Tmall, Tmall Supermarket + Direct Import; domestic wholesale;

International Group: Cross-border retail AliExpress, cross-border wholesale international station, overseas local retail Lazada, Trendyol, etc.;

Local Life: Ele.me and Amap;

Cainiao Group: Same as before, but now the revenue calculation method treats other businesses within Alibaba Group as clients, and the revenue they generate is included in Cainiao's revenue;

Intelligent Cloud Group: Alibaba Cloud, DingTalk was separated into other business categories in the September 2023 quarter;

Pan-Entertainment Group: Youku and Alibaba Pictures;

All others: Hema (rumored to be sold), Alibaba Health, Intime (these three belong to self-operated new retail with offline formats, originally in domestic commerce); Lingxi Interactive, UC, Quark (originally in pan-entertainment business), Fliggy (originally in local life business), DingTalk (originally in cloud business)

II. CMR and profit both miss, Taotian remains the biggest challenge

After the new management team set the top-level strategy for Taobao and Tmall to return to users, under the measures of traffic tilt towards small businesses and benefiting consumers, the order growth rate > GMV growth rate > revenue growth rate > greater than profit growth rate has been the norm for Taotian Group's performance in recent quarters.

This quarter, due to weak retail data, the market revised down the GMV growth expectation for Taotian from a high single-digit in 1Q25 to a low single-digit this season. However, due to the additional 0.6% service fee and the promotion of advertising tools across the site in early September, Taotian's monetization rate is expected to stabilize, thereby narrowing the gap between CMR and GMV growth .

In terms of actual performance, this quarter's domestic retail customer management revenue (CMR) grew by 2.5% year-on-year, an improvement from 0.6% in the previous quarter, but still slightly lagging behind the consensus average expectation of 3.3%.

However, although Alibaba did not disclose the GMV growth rate or range this time, only stating that the order volume growth remains double-digit, it officially indicated that the take rate has stabilized year-on-year. Although this does not necessarily mean that the take rate has completely stopped declining and rebounding (i.e., the GMV growth rate this season is approximately 2%). Looking ahead to the next few quarters, the growth rate gap between CMR and GMV is expected to continue to narrow until CMR growth surpasses, which should be a high-probability event.

The growth trend of CMR has improved, but it is still weak compared to expectations, which can barely offset each other. Taotian Group's adjusted EBITA this season was 44.6 billion, a year-on-year decrease of about 5.3%, the decline has expanded from 1% in the previous quarter and is also lower than the expected 45.9 billion, with no compensatory measures. According to the company, the decline in profit is mainly due to increased investment to enhance customer experience (such as subsidies).

III. Self-operated retail continues to shrink, while the "veteran" wholesale continues to thrive

In Taotian Group, the self-operated retail business saw a year-on-year revenue decline of 5.3% this season, narrowing from -10% in the previous quarter, with the improvement rate roughly consistent with JD's self-operated retail situation. The company explained that the main reason for the continued negative revenue growth is the decline in home appliance sales . We believe that the recent national subsidies should also contribute significantly to the improvement of Taotian's self-operated growth, but JD has a stronger mindshare in home appliances, so Taotian's revenue increase may still be relatively small.

Meanwhile, the oldest 1688.com wholesale business, as a major focus of Taotian's "cost-performance" strategy, saw a year-on-year revenue growth of 17.5% this quarter, maintaining high growth and slightly accelerating. **

Overall, the slightly below expectations CMR was offset by strong wholesale revenue, with TaoTian Group's overall revenue this quarter growing 1.4% year-on-year, basically meeting market consensus expectations.

IV. Alibaba Cloud continues to move towards double-digit growth

Alibaba Group's second pillar—Alibaba Cloud business achieved revenue of 29.6 billion this quarter, with a year-on-year growth rate of 7.1%, improving from 5.7% in the previous quarter, although it was completely in line with expectations and did not beat them. According to the company, the growth recovery was mainly driven by double-digit growth in public cloud services (with contributions from AI as well), but was dragged down by the actively eliminated private cloud services.

From a profit perspective, Alibaba Cloud's adjusted EBITA profit reached 2.66 billion this quarter, exceeding expectations by 21%. The Adj. EBITA profit margin increased by another 0.2 percentage points quarter-on-quarter, and the trend of profit improvement continues.

Although there is still some distance from the management's claim that the growth rate of cloud business will return to double digits in the second half of 2024, the continued increase in both revenue growth and profit margin will undoubtedly further strengthen market confidence in the continued recovery of the cloud business.

V. international e-commerce continues to operate with precision, growth slows, and losses narrow

Compared to the internal competition in domestic e-commerce, the consensus among domestic internet companies since 2023 has been to seek incremental growth through cross-border expansion. This quarter, due to the international business shifting from a high-profile strategy to more refined operations since last quarter, and the base has significantly increased during the same period, international e-commerce revenue growth slightly slowed to 29% year-on-year. However, the market also had expectations, with growth exceeding market expectations by 1.5 percentage points. Among them, international retail and international wholesale businesses had growth rates of 35% and 9.4%, respectively, both slowing by 3-4 percentage points compared to the previous quarter, with a generally similar trend.

**Corresponding to the slowdown in growth, the losses in the international segment also continued to narrow this quarter. The Adj. EBITA loss, excluding stock incentive expenses and amortization expenses, narrowed from 3.7 billion in the previous quarter to 2.9 billion, which was better than expected. The loss rate also narrowed from -12.7% to -9.2%. With increasing regulatory risks in cross-border business, it is suitable to quietly make profits, while local e-commerce in Southeast Asia and other international markets continues to pursue profits, the profit margin of international business is likely to continue to improve **

VI. Cainiao, which coexists with AIDC, has a different fate

Currently, Cainiao's logic is almost symbiotic with its overseas business. Due to the slowdown in growth in the international e-commerce sector, Cainiao's revenue growth rate has dropped from 15.7% to 8% year-on-year this quarter. However, due to the high capital expenditure required for cross-border logistics, Cainiao's previously profitable adjusted EBITA has significantly narrowed to only 60 million this quarter, far below expectations. If we look at the combined losses of international e-commerce and Cainiao, the total loss has only narrowed by about 200-300 million, which is not good. The profitable light asset is in international e-commerce, while the heavy asset logistics capital expenditure is borne by Cainiao, which can only be said to have the same origin but a different fate.

VII. Local service revenue misses expectations, but loss reduction beats expectations? Refined operations are the reality

Alibaba's local service revenue grew by 13.9% this quarter, slightly accelerating, but the market expected a growth rate as high as 24%, resulting in a significant miss. However, the market expected a loss of 920 million, but the actual loss was only 390 million.

Therefore, contrary to the market's expectations of high investment, high growth, and high losses, Alibaba's local life actually adopts a strategy of steady growth and loss reduction, which Dolphin Investment Research believes is a better strategy.

VIII. The pace of turning losses into profits for the entertainment and "N" companies has slowed down, and have they reinvested again?

Other relatively marginal large entertainment and other "N" companies share a commonality this quarter: the pace of narrowing losses has slowed down. The large entertainment sector reported a loss of 180 million this quarter, higher than the 100 million loss last quarter and above market expectations. The overall loss for the "N" companies was 1.58 billion, in line with market expectations, but the loss has also expanded compared to the previous quarter. It seems that the investment intensity has increased again?

IX. Group profit margin declines, and the surprise of comprehensive loss reduction in various businesses last quarter is no longer present

Overall, because the revenue growth rates of Alibaba Cloud and the international e-commerce sector met or slightly exceeded expectations, other sectors' revenues have missed expectations to varying degrees, thus Alibaba Group's overall revenue growth this quarter is about 5.2%, lower than the market expectation of about 6%. The acceleration in revenue growth is not as large as expected.

In terms of profit, the adjusted EBITA of Taotian Group was lower than the expected profit of 1.3 billion, offset by the profit released by Alibaba Cloud, while the local business, which is still in actual loss, further dampened the overall profit indicators of the group, which are generally in line with expectations. The overall adjusted EBITA profit margin of the group also declined from 18.5% last quarter to 17.2%. The surprise of significantly reduced losses in all businesses except Taotian last quarter did not continue into this quarter.**

X. The significant increase in expense investment is indeed the "culprit" for the decline in profit margins.

How have costs and expenses changed? First, this quarter Alibaba's gross profit margin, excluding stock incentives, increased by a full 1 percentage point compared to the same period last year, slightly down from the 1.1 percentage point increase from the previous quarter. The gross profit margin continues to trend upward, but the extent of improvement has indeed narrowed slightly.

In terms of expenses, excluding stock incentives, marketing expenses increased by nearly 30% year-on-year, far exceeding the 19% year-on-year growth from the previous quarter, and actual marketing spending was nearly 9% higher than expected. It is evident that Alibaba's overall spending on customer acquisition and subsidies has significantly increased, which is the main reason for the decline in profit margins this quarter.

As for management and R&D expenses, they also increased by 10% to 11% year-on-year, although the extent is not as exaggerated as marketing expenses, given that this quarter's revenue growth was only 5%, the expense ratios for R&D and management are also expanding. It is clear that the increase in expense spending is the "culprit" behind the decline in group profits.