Alibaba: 2x opportunity ahead (SOTP valuation)
Alibaba is not only seeing strong growth in areas like Tmall Taobao Group, its international e-commerce segment and cloud segment, but it is also showing strong profitability improvements across multiple segments.
We continue to see Alibaba invest in key growth areas like AI and instant commerce, while managing that with the continued expansion of margins.
Alibaba Cloud is arguably the best positioned cloud player outside of the US hyperscalers and thus, it is seeing a huge upside from growing AI demand, especially within China.
FY4Q25: In-line revenues, profits miss
Total revenues of Alibaba grew 7% from the prior year to Rmb236.5 billion, in-line with expectations.
Adjusted EBITDA grew 36% from the prior year to Rmb32.6 billion. This was due to both improvements in operating efficiency and revenue growth but partially offset by the increasing investments in its e-commerce businesses and technology.
The total adjusted EBITA margin was 14%, up from 10.8% a year ago.
Net income grew +18.4% year-over-year to Rmb30.0 billion, 3% below consensus expectations of Rmb31.0 billion. While revenues and gross profit margin was in-line with expectations, the lower R&D and G&A expenses were offset by the higher S&M expenses.
EPS for the quarter came in at Rmb12.52, 1.5% below consensus expectations of Rmb12.71.
The share repurchase program resulted in $11.9 billion in shares being repurchases and 5.1% net reduction in share count, which helped offset some of the weakness in margins seen earlier.
Segment analysis
Taobao and Tmall Group remain the largest revenue contributor to Alibaba, representing 43% of total revenues.
Taobao and Tmall Group segment revenue grew +9% year-over-year to Rmb101.4 billion, 3.6% ahead of expectations.
Adjusted EBITA for Taobao and Tmall Group grew 8% year-over-year. Adjusted EBITA margin is flat year-over-year at 41.2%, compared to 41.3% in the same quarter last year.
Alibaba International Digital Commerce Group segment revenue grew +22% year-over-year to Rmb33.6 billion, 5% below expectations.
Adjusted EBITA margin for Alibaba International Digital Commerce Group narrowed to -10.6%, compared to -14.9% in the same quarter last year.
Another important segment, the Cloud Intelligence Group, saw segment revenue grow +18% year-over-year to Rmb30.1 billion, in-line with expectations.
The adjusted EBITA margin for Cloud Intelligence Group was 8.0%, improving from the 5.6% same period last year.
Local Services Group segment revenue grew +10% year-over-year to Rmb16.1 billion, in-line with expectations.
Adjusted EBITA loss margin for the Local Services Group narrowed and reached -14.4% compared to -21.9% in the same period last year.
Cainiao Smart Logistics Network segment revenue fell -12% year-over-year to Rmb21.6 billion, while Digital Media and Entertainment Group segment revenue grew +12% in-line with expectations. to Rmb5.55 billion.
Adjusted EBITA loss margin for Cainiao Smart Logistics Network narrowed to -2.8%, compared to -5.5% in the same period last year. The adjusted EBITA margin for Digital Media and Entertainment Group turned positive this quarter and made significant improvement to +0.6%, up from -17.9% in the same period last year.
EBITA outlook of Taobao Tmall Group
Management stressed that the Taobao Tmall Group will continue to invest its core business and user experience to maintain market share.
These include investing in pricing and services so that consumers can enjoy price competitive products and good user experience.
Furthermore, an additional Rmb10 billion budget will be used for investment into instant commerce.
This suggests that Alibaba’s Taobao Tmall Group remains in the investment stage and that we may not have seen stabilized EBITA margins for this segment yet.
Starting from this quarter, Alibaba will make new investments in instant commerce which will have an impact on EBITA while these investments will result in the acquisition of new users and increase in user stickiness.
Overall, Alibaba expects quarterly fluctuations in e-commerce EBITA depending on competition dynamics.
Investment rationale for instant commerce
Alibaba sees a large opportunity in instant commerce, with the potential to reach 1 billion consumers in China.
With its existing large Taobao user base and logistics capabilities to provide an excellent service experience in this space, Alibaba is well positioned to enter and be successful in the space.
In fact, management shared that instant commerce is not new to Alibaba, with previous investments in Eleme and Freshippo and it is natural for Alibaba to develop and grow in this market.
In the last 2 weeks, management shared that they have started initial trials for Taobao Instant Commerce offerings.
The initial results have exceeded management’s expectations, both in terms of scale and efficiency.
There are clear synergies for instant commerce and Alibaba’s current businesses and in the long-term, the investment into the space should be positive for the Taobao Tmall Group.