Alibaba FQ4 23 – Doldrums pt. II

So much to fix.

• The full spin-out of its cloud business failed to direct investors’ attention away from a very dull set of results which show almost no recovery in the Chinese economy and that management has a lot of things to fix to get Alibaba back on track.
• FQ4 23 revenues / EPS were RMB208bn (up 2% YoY) / RMB1.34 (up 35% YoY) both of which were slightly ahead of expectations but the failure to see a proper recovery was the overriding theme.
• Digging into the numbers paints a bleaker picture as Chinese commerce retail fell by 3% YoY which was offset by 29% growth in international and 18% YoY growth at Cainiao logistics.
• This combined with Tencent’s much better performance implies that there is a moderate Chinese recovery in terms of activity, but Alibaba is not seeing any of it.
• Instead, it appears to be losing share gained during the lockdown back to bricks and mortar as Chinese consumers head back out to the high street.
• The only real good news in these numbers is profitability where adjusted operating margins improved to 12% from 8% in FQ4 2022 and free cash flow for the fiscal year 2023 almost doubled to RMB172bn.
• In an effort to deflect attention away from this depressing turn of affairs, the company chose to announce the complete spin-out of the cloud business as a share distribution to existing investors.
• This means that AliCloud will no longer be part of Alibaba but have a share price of its own with the idea being that this should unlock value being obscured by the soggy e-commerce business.
• This sounds great except that unlike AWS, Azure and Google Cloud, AliCloud is not growing at 30% but instead declined 2% YoY during FQ4 2023.
• Alibaba gave a number of “one-off” reasons for this, but the fact of the matter is that unless it gets back to growth, the multiple that is applied to its valuation will be far less than is used elsewhere.
• AliCloud is also very unprofitable compared to its global peers which I think raises questions about whether this segment is ready to be spun out from the group and given a public listing.
• The net result is that Alibaba still has a massive amount of work to do if it wants to return to anything like its former glory.
• It is still the dominant e-commerce platform in the world’s second-largest economy and transacts far more business than Amazon does, but there is a lot of work to do to get the house in order.
• This is why the shares are cheap, trading on 9.1x 2024 PER meaning that there is a lot of upside when management finally manages to turn the juggernaut around.
• This may well take a long time and investors (like me) are going to have to be patient, but eventually, I think that even this dog will have its day.