Investment update on Alibaba #1
Is Alibaba still a good value after their 60% YTD increase?
Dear readers, before we dive into Alibaba earnings, a few quick announcements.
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Alright, let’s review these great earnings from Alibaba!
Alibaba has been having a great year so far. Since the DeepSeek AI news, it’s like the market suddenly remembered Alibaba is an AI leader in China. When we initially wrote about Alibaba, the stock was considerably undervalued. However, after this 60% rise YTD, it definitely merits another look. Luckily, we also have new Dec 2024 earning numbers which will help us update our assumptions and valuations.
As always, I advise first reviewing our original Investment thesis on Alibaba to get an understanding of the initial assumptions that went into this investment.
Top Line Results
Total revenue for December 2024 Quarter increased 8% YoY to $38.4 billion. While this isn’t particularly fast, the important thing is that almost all sectors are accelerating growth indicating pickup in the overall Chinese economy. In addition, adjusted EBITA in the most critical Taobao and Tmall group sector is back to positive growth YoY. I include both the YoY comparisons for the December 2024 quarter as well as the previous September 2024 quarter for comparison.
Income measures generally increased in the low single digits YoY. Adjusted EBITA grew 4% YoY. Non-GAAP net income increased 6% YoY while Non-GAAP diluted earnings per ADS grew 13% from 18.97 RMB to 21.39 RMB YoY mostly as a result the reduction in shares from stock buyback.
Notably, BABA has also begun significantly ramping up their capital expenditure like their US counterparts. Free cash flow decreased 31% from 56.540 billion RMB to 39.020 billion RMB YoY due to the increased expenditure in cloud infrastructure. This pattern is likely to continue in the near term if they follow a similar capex spending pattern as the Big Tech companies in the United States.
Updates on investment thesis
As we note in our original investment thesis:
Alibaba is a value play with considerable upside given the AI exposure. Even using the fairly conservative scenarios in the valuation section, Alibaba shows as undervalued. As the future impact of AI, China’s economy, their AIDC group, and cloud computing growth becomes more clear in future earnings calls, there will be an opportunity to update these.
Alibaba’s meteoric increase in stock price up until the December 2024 earnings can be primarily attributed to their AI exposure. This story continues to play well although it is still not clear Alibaba is benefitting sufficiently from its investments yet. Importantly, this is different from Amazon’s situation where they have now had time to clearly demonstrated how they are benefiting from AI. Market sentiment here assumes Alibaba can operationalize this benefit given others have been able to.
I believe their more recent increase in stock price after December 2024 earnings is a result of the perceived improvement in China’s economy. We can see broad acceleration of growth across the board including their cloud computing arm.
As a side note, their AIDC arm continues to grow fast but also continues losing more money so this is a story that needs more time to play out. Continues to be interesting but I’ve never been impressed by revenue growth at the cost of losing money.
All this brings us back to the most important component of this investment thesis: Valuation.
Alibaba at its core was a deep valuation play. I do not expect them to do as well as Amazon but at the price that they were at, they did not need to. However, this is now changing. The recent rally in stock price has made the stock more expensive but the changes in China’s economy and the AI story has also put the company in a better place. Every individual investor will need to weight these changes to decide if Alibaba remains a good investment.
For us, we review the valuation numbers below to arrive at our own conclusion.
This wraps up the overview of earnings. The following section will focus on detailed and updated Valuation of Alibaba and is exclusive for paid subscribers.