Alibaba (BABA)’s secret weapon for future growth

Amid challenging regulatory pressures, economic headwinds, and fierce market competition. Alibaba Group Holding Limited (BABA) We have demonstrated resilient performance, as evidenced by our most recent quarterly results. Shares of the Chinese e-commerce giant have risen more than 7% in the past three months. Additionally, the stock is trading above its 50-day and 200-day moving averages of $76.20 and $78.79, respectively, reflecting solid momentum.

Alibaba’s diverse business portfolio is the driving force behind its consistent financial performance. for fourth quarter For the year ended March 31, 2024, BABA’s revenue increased 7% year-over-year to $30.73 billion, beating analysts’ estimates of $30.42 billion. Growth was driven by strong performance across its core e-commerce and cloud computing segments.

BABA’s strategic investments in Alibaba Cloud infrastructure and domestic and international e-commerce platforms have fueled double-digit growth in key metrics such as gross merchandise value (GMV). However, the company’s operating profit fell 3% year over year to $2.05 billion.

Alibaba has observed early signs of a recovery in its core e-commerce business amid cautious consumer spending in China. Taobao and Tmall Group’s revenue rose 4% year-on-year to $12.91 billion, while customer care revenue rose 5%, a rebound from the previous quarter. Additionally, Alibaba International Digital Commerce Group (AIDC)’s revenue surged 45% year-on-year to $3.8 billion.

BABA’s CEO Eddie Wu said the strategy was “working and we are returning to growth”, with the company’s promise to ‘reignite’ growth through further investment starting to yield results.

But what’s behind this strong growth?

Alibaba’s secret weapon lies in its Cloud Intelligence Group, its digital technology and intelligence division. It was Alibaba’s second-largest revenue generator last year. The segment’s revenue increased 3% year over year to $3.54 billion, driven by double-digit growth in its public cloud business. Core products such as elastic computing, databases, and AI products drove significant triple-digit growth in AI-related revenue in the fourth quarter alone. The surge in demand for advanced AI solutions is enabling companies to capitalize on the burgeoning AI market.

Alibaba aims to promote long-term growth and attract startups and small and medium-sized businesses. Aggressively reduced prices on more than 100 core public cloud products. (Includes Elastic Compute Service (ECS), Object Storage Service, and Database product categories). The scheme was later expanded globally in April. Average price 23% Reduction. Customers who order through Alibaba’s official website can now enjoy discounts of up to 59% on computing, storage, network, database, and big data products.

“Cloud infrastructure is poised to become a key cornerstone for the future of AI, and our commitment lies in keeping the foundation for AI development affordable,” said Selina Yuan, President of Alibaba Cloud Intelligence International Business Unit. .

Moreover, Alibaba Cloud’s AI capabilities are quickly gaining traction: 90,000+ companies Within a year of its debut, Qwen LLM (Large Language Model) was adopted and has achieved more than 7 million downloads on open source platforms such as Github. Alibaba Cloud has launched Qwen2.5, the latest addition to its Qwen model family to meet the growing demand for AI solutions.

Additionally, Alibaba Cloud recently launched services to help companies customize and scale generative AI models, from integrating multiple models to optimizing underlying infrastructure resources. PAI-Lingjun Intelligent Computing Service, an AI computing platform tailored for high-performance computing tasks, is also available. Expands territory to Singapore For the first time this year.

Additionally, the group’s strategic focus on public cloud and operational efficiency led to adjusted EBITDA of $848 million in fiscal 2024, up 49% year-on-year. These growth figures further solidify Alibaba Cloud’s role as an important driver of the company’s future. growth.

Is price cutting a strategic plan or a race to the bottom?

Alibaba’s recent move to lower prices across cloud services shook the market. Some say it’s a smart move to attract more customers (especially as demand for AI services grows), while others worry it could hurt profits in the long term.

Enterprise spending on generative AI services is expected to be: $143 billion in 2027 The timing of BABA’s price adjustments globally appears to be strategic and positions the company to tap into growing markets.

Meanwhile, due to BABA’s price cut, Price war between Chinese tech giants, Baidu Cloud and ByteDance are quickly catching up with competitive products. While these cuts benefit consumers, they weaken Alibaba’s position in the global market. Despite having More than 30% Alibaba, the leader in China’s Infrastructure as a Service market, still lags behind AWS in the broader Asia Pacific region. Alibaba Cloud Global cloud computing marketAWS, Microsoft Azure, and Google Cloud dominate the landscape.

Making headway against these industry giants is not easy, especially considering their strong presence in Western markets. Price cuts can attract budget-conscious customers and strengthen Alibaba’s position in emerging markets, but success will depend on maintaining high-quality service and innovation over the long term. Only time will tell whether Alibaba’s gamble will pay off.

conclusion

BABA reported a significant increase in revenue in the fourth quarter of fiscal 2024. But the e-commerce giant’s profits have plummeted. Despite the weak revenue, CFO Toby Xu expressed confidence in the company’s business prospects, citing early positive results from strategic investments and partnerships. Alibaba sees AI as an important driver of innovation and value creation within its ecosystem.

During the March quarter, AI-related sales achieved “triple-digit year-over-year growth.” Revenues were generated from customers in the basic model companies, Internet companies, financial services and automotive industries.

Analysts expect BABA’s first quarter (ending June 2024) revenue to reach $34.1 billion, up 5.1% year-over-year. However, EPS for the quarter is expected to be $2.03, down 15.6% year-over-year. Additionally, Alibaba’s revenue is expected to reach $140.92 billion in fiscal 2025 (up 8.3% year-over-year), while the consensus EPS estimate is $8.23, representing a 4.4% year-over-year decline.

In terms of non-GAAP forward P/E, BABA is trading at 9.61x, 39.5% below the industry average of 15.88x. Likewise, the stock’s future EV/EBITDA and price/book value of 5.94 and 1.31 are 39% and 45.3% lower than the industry averages of 9.73 and 2.40, respectively.

In response to the low valuation, Alibaba executives purchased $4.8 billion worth of stock during the fourth quarter. Moreover, earlier this year, the company strengthened its share repurchase program by an additional $25 billion, extending it until the end of March 2027.

BABA has approved a two-part dividend plan totaling $4 billion to further demonstrate its commitment to returning value to shareholders. The plan includes a regular cash dividend of $0.125 per common share or $1 per ADS and a one-time special cash dividend of $0.0825 per common share or $0.66 per ADS in FY24. Both dividends will be paid in U.S. dollars to holders of common shares and ADSs as of the close of business on June 13, 2024.

While the impact of price cuts on Alibaba’s bottom line is yet to be seen, achieving double-digit revenue growth across certain segments amidst strategic price adjustments highlights the company’s resilience and adaptability in an ever-evolving market environment.