Alibaba (NYSE:BABA) (HKG:9988) is the world’s largest e-commerce firm in terms of Gross Merchandise Volume (GMV) and also dominates the cloud computing market with Aliyun, the cloud computing arm of its business. 

In this article, we will be analysing some of the financial highlights from the e-commerce behemoth’s latest quarter. 

Just to take note, Alibaba’s reports its revenues from the start of April to the end of March (i.e. FY 2021 would mean the start of Apr 2020 to the end of Mar 2021). But for simplicity sake, I will refer to July – September 2021’s quarterly report as 2021 3Q’s results.

1. Revenue

Revenue was RMB200,690 million, an increase of 29% year-over-year. Excluding the consolidation of Sun Art, Alibaba’s revenue would have grown 16% year-over-year (YoY) to RMB180,438 million. 

Revenue growth for the last few quarters has inevitably slowed down as restriction measures start to ease and people are allowed to visit physical shops again.

However, for such a large company like Alibaba to continue achieving a 29% growth rate from an elevated base last year due to the pandemic, it just goes to show that the e-commerce growth story is far from over.

2. Revenue By Segment

As can be seen, revenue has increased year on year for all business segments of Alibaba, namely the commerce (which includes China and international commerce), cloud computing, digital media and entertainment and innovation initiatives segments. 

China and International Retail commerce had impressive growth rates of 33% YoY each in 3Q of 2021.

Cloud computing revenue also increased by 33% YoY.

Concerns

The only concern I would have with Alibaba’s top-line growth is probably the Customer Management revenue (which is part of China retail revenue) which has increased by a mere 3% YoY. This revenue also did not increase by much in the previous quarter. 

Customer Management revenue includes revenue from advertising services provided to merchants and commission fees collected when products are sold on Alibaba’s e-commerce platforms.

Alibaba recorded single-digit physical goods GMV year-over-year growth, primarily due to slowing market conditions and more players in the China e-commerce market.

Competitors like JD.com and Pinduoduo have managed to take away some market share from Alibaba. In order to maintain its dominant position, Alibaba must continuously innovate its services and platforms to improve the customer experience. 

However, what’s relieving to know is that Annual Active Customers (AAC) for Alibaba is continuing a strong upward trajectory.

AAC of the Alibaba Ecosystem across the world reached approximately 1.24 billion for the twelve months ended September 30, 2021, an increase of 62 million quarter-on-quarter (or 5%). 

This includes 953 million consumers in China and 285 million consumers overseas, representing a quarterly net increase of 41 million and 20 million, respectively.

The increase in international users represents an 8% growth in a single quarter, or 30% annualised growth.

This means that over time, Alibaba will be more globally diversified and less reliant on the China market for growth. By expanding beyond China, this also increases the size of Alibaba’s total addressable market. Capitalising on the e-commerce growth in other countries outside of China, I believe, will be a huge driver of Alibaba’s future growth.

3. Robust Customer Acquisition Strategies

Taobao Deals provides consumers with value-for-money products, and the platform is experiencing strong growth in the number of customers from lower-tier cities. 

Alibaba is also improving the efficiency of its international logistics. 

In an attempt to improve the shopping experience for international customers, Cainiao, the logistics arm of Alibaba, has launched self-pickup lockers in four European countries where AliExpress has operations.

All these efforts should serve to onboard more customers to Alibaba’s ecosystem. With most people in China already using one or more of Alibaba’s services, Alibaba is now making efforts to acquire more customers from overseas and the lower-tier cities in China where it still has a lot of room to grow. 

4. Operating income

Income from operations was RMB15,006 million, an increase of 10% year-over-year due to an RMB15,690 million decrease in share-based compensation expense related to Ant Group share-based awards granted to employees. 

5. Net income 

Net income attributable to ordinary shareholders in 3Q 21 was RMB5,367 million, a decrease of 81% YoY. 

The sharp decrease was primarily due to net losses arising from changes in market prices of equity investments in publicly-traded companies, as well as Alibaba’s increased investments in key strategic areas and support to merchants.

The company has increased its investments by RMB 12,575 million YoY in key strategic areas within its commerce segments, such as Taobao Deals, Local Consumer Services, Community Marketplaces and Lazada. 

Alibaba’s management is committed to investing excess profit into strategic areas within commerce, as they address new consumption demand and will continue to expand Alibaba’s addressable market in China. 

I believe these businesses have the potential to be the long-term revenue growth drivers that continue to catalyse Alibaba’s multi-growth engines in the future. These businesses will continue to increase consumer mindshare and wallet share that will be important to Alibaba’s long-term growth and value.

This gives me confidence that future revenue and profit growth will continue to be bolstered by such newer business initiatives. 

Therefore, I believe this quarter’s decrease in net income should not be seen as deteriorating business fundamentals but instead reflects the continuous effort by the management to invest in newer growth initiatives. 

6. Cloud Computing 

Adjusted EBITA for cloud computing turned from a loss of RMB567 million to a profit of RMB396 million in 2021 3Q, primarily attributable to the realisation of economies of scale.

The secular growth trend in cloud computing will continue to be a tailwind that helps to drive Alibaba’s cloud business. 

Alibaba is also committed to investing in research and development in new product offerings for its cloud business. 

Some of Alibaba Cloud’s recent innovations include the Yitian 710 Chip, which will be deployed in its data centres and the Anolis OS operating system. 

Cloud Computing Slowdown

Some investors might have noticed a slow down in revenue growth for Alibaba’s cloud computing segment. From FY 2019 to 2020, cloud computing revenue grew by 62% and 50% from FY 2020 to 2021. 

So a measly 33% growth seems to raise concerns that growth in Alibaba’s cloud computing is slowing down. 

Slower quarterly revenue growth in the past quarters was primarily due to revenue decline from a top cloud customer in the Internet industry that has stopped using its overseas cloud services.

Excluding the loss from this customer, the revenue growth for cloud computing would be considerably higher.

Moreover, the top 10 customers of Alibaba cloud now make up single-digit percentages of the total cloud revenue. This means that Alibaba cloud’s revenue streams are sufficiently diversified. 

7. FY 2022 Guidance

The company expects its fiscal year 2022 revenue to grow 20% to 23% year-over-year.

The guidance was given after taking into account the softer market conditions with slower than expected consumption growth in China.

Conclusion

This stock has gained so much attention over the past year, due to its stock price continuing to fall further and further. Many therefore wonder whether the share price will ever rebound. 

Despite the negative sentiments surrounding Alibaba and other Chinese stocks given the infamous regulatory crackdown, I still believe Alibaba has and will continue to show impressive results.

Alibaba is a key contributor to the digital infrastructure in China, and increasingly, in other parts of the world. Its holistic ecosystem offers a comprehensive range of services from e-commerce, cloud computing to Fintech. Additionally, Alibaba enjoys strong tailwinds in its e-commerce and cloud computing segment, both very strong secular growth trends. 

However, moving forward, investors still need to bear in mind that the Chinese government may continue to impose similar regulations in the future. What these regulations specifically entail and their specific impact on Alibaba’s business we do not know. This is a risk and uncertainty that investors looking to invest in China must be comfortable with.

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