AI to the rescue, is Alibaba resurrected?

Since January 13, DeepSeek has replicated the "ChatGPT" moment of the US stock market domestically, leading to a reassessment of AI assets in China. $Alibaba(BABA.US) has risen about 50% from its low point, and there is no doubt that it is one of the most 关注 and favored targets in this wave of enthusiasm. As a support for whether Alibaba can further rise, this performance is quite a surprise and has played a role in supporting the previous surge. Specifically:

1. CMR and profit both beat expectations, is Taotian officially back to growth?

Although macro retail data shows that the overall growth rate of online physical retail has decreased from 6.2% to 3.5%, the 4Q performance guidance released by Alibaba and JD has generally improved compared to 3Q. The market expects Taotian Group's CMR growth rate to improve from 2.5% in 3Q to 5%~6%. In fact, the domestic retail customer management revenue (CMR) this quarter grew by 9% year-on-year, which is stronger than the consensus expectation of recovery.

The stronger-than-expected CMR growth is attributed to the 0.6% service fee added in early September and the promotion of advertising tools across the platform, which positively impacted Taotian's monetization rate and was fully released this quarter. The continuous acceleration of CMR growth for three consecutive quarters since FY25 basically confirms the trend of Taotian's take rate stopping its decline and rebounding.

Taotian's profit performance this season is also quite good. This season's adjusted EBITA is 61.1 billion, with a year-on-year positive growth of 2%, significantly better than the median year-on-year decline of about -2% expected by sell-side analysts. However, we also note that JPM expected Taotian's profit this season to grow by 6% year-on-year before the performance announcement. We believe that a considerable amount of funds should have been aware of this news, so the actual 2% growth may be in line with expectations compared to the buy-side's expectations. Combined with the significantly higher-than-expected marketing expenses this quarter, it should still have a certain drag on profitability.

2. Alibaba Cloud officially moves towards double-digit growth, the future is bright.

As a major beneficiary asset in the AI wave, the reassessment of Alibaba Cloud is the main reason for this round of increase. This quarter, Alibaba Cloud's growth is expected to warm up to over 10%, fulfilling the promise of returning to double-digit growth. The key is whether the growth rate can be significantly boosted under the drive of AI in the future.

In fact, Alibaba Cloud's revenue this quarter reached 31.7 billion, with a year-on-year growth rate of 13%, significantly better than the market consensus expectation of 9.7%. Although the actual expectations of the buy-side may have increased to over 10% in the recent rise, a 3 percentage point beat should still be a relatively satisfactory figure for the buy-side, according to Dolphin Research.

From a profit perspective, this quarter Alibaba Cloud's adjusted EBITA profit reached 3.14 billion, exceeding the expected 2.83 billion. The adjusted EBITA profit margin increased by another 0.9 percentage points quarter-on-quarter. As the core of this Alibaba revaluation (more important than even the Taotian business), the dual beat of Alibaba Cloud's revenue and profit will undoubtedly drive the market further towards optimism.

3. International E-commerce Growth & Losses Both Expand, Unfazed by Geopolitical Risks?

This quarter, international e-commerce revenue grew by 32.4% year-on-year. It did not slow down as the market expected; instead, it accelerated growth compared to the previous quarter, outperforming the expected growth rate of 26.8%. The growth rate of international retail business was roughly consistent with the previous quarter, but the growth of international wholesale business increased from 9.4% to 18% quarter-on-quarter, driving overall growth.

Corresponding to the accelerated growth, the losses in the international segment also expanded to 5 billion, higher than the 3 billion losses expected by the market and last year's same period. The loss rate also expanded by about 2 percentage points year-on-year. According to the company, during the 4Q consumption peak season, the company increased investment and customer acquisition efforts in regions like Europe, leading to simultaneous growth and loss expansion.

4. Cainiao

Cainiao's revenue growth unexpectedly fell to a negative growth of 0.8%, which was outside market expectations. Combined with previous news reports, Cainiao has reallocated some of its original platform-type business to Taotian and the international e-commerce group, which should be the main reason for this negative revenue growth. Therefore, the acceleration of growth in the international e-commerce group (which should be somewhat affected by Taotian) should also be influenced by this business reallocation.

5. Local Services Losses Expand, Competition Intensifies

Alibaba's local services performance this quarter was slightly below expectations, with revenue growth of 12.1%, showing a slight slowdown compared to the previous quarter, and not meeting the market expectation of 13.5%. At the same time, losses also significantly expanded to 600 million, higher than the expected loss of 520 million. Looking at these two indicators, there seems to be signs of a deteriorating competitive environment. Recently, JD.com also announced its entry into the food delivery and ride-hailing business, which may further intensify the competitive environment.

6. Pan-Entertainment and “N” Companies Continue to Expect Reduced Losses, Impact of Asset Sales Will Only Reflect in Next Quarter's Reports

The big entertainment and other “N” companies' revenue this quarter was generally in line with market expectations, but the extent of losses has further widened. The big entertainment lost 310 million this quarter, higher than the previous quarter's loss of 180 million. Meanwhile, the overall losses of the “N” companies reached 3.16 billion, nearly doubling the loss extent compared to the previous quarter. While the performance trends of core Taotian and Alibaba Cloud have improved, the “courage” to invest in relatively marginal assets seems to have also increased.

7. Aggressive Spending Leads to Less Impressive Profits

Although the growth of key business segments has significantly improved, this quarter's profits did not exceed expectations by much. Alibaba Group's overall adjusted EBITA was 54.9 billion, only slightly higher than the market expectation of 53.6 billion. Aside from the improving profit margins of Taotian and Alibaba Cloud, most other segments have seen an increase in losses due to increased investment efforts, which dragged down profit performance.

In terms of expenses, excluding stock-based compensation, this quarter's marketing expenditure reached 42.7 billion, an increase of nearly 9 billion compared to the same period last year, and far exceeding the market expectation of 37.2 billion. It is evident that Alibaba's overall spending on customer acquisition and subsidies has significantly increased, which is one of the main reasons why profits are not particularly impressive **

8. AI-Driven Capital Expenditure Surge

With the valuation increase brought about by the AI narrative, the market's attention to the scale of Capex investment required for AI has also significantly grown. According to the cash flow statement, Alibaba's investment in fixed assets this quarter exceeded 31 billion, far surpassing the market's original expectation of just over 14 billion. Combined with management's statements, the annualized expenditure is likely to exceed 100 billion in the future.

Dolphin Research Perspective:

Overall, Alibaba's performance this time can be described as quite outstanding. The two core businesses—Taotian Group's CMR exceeded the still elevated market expectations, reaching 9%, and the adjusted EBITA also saw its first year-on-year rebound in three quarters, validating the take rate's recovery, suggesting that the core e-commerce business is likely to at least stabilize and profits will no longer decline.

As for the other core business—Alibaba Cloud, both revenue and profit improved quarter-on-quarter, performing better than market expectations, which initially validated the market's optimistic sentiment regarding Alibaba Cloud's future prospects. This has led the market to further envision the substantial revenue and profit growth potential for Alibaba Cloud in the AI era.

Regarding other business segments, although they generally show signs of expanding losses, the market's current focus is not on these businesses, and they are not reflected in the valuations. On the other hand, as the growth and revenue-generating capabilities of the aforementioned two core segments improve marginally, the development strategies and investment expectations for other "younger" businesses have become relatively more optimistic, which is clearly reasonable and not something that needs excessive criticism.

Looking back at Alibaba's stock price fluctuations since the last earnings report: from the last earnings report release (November 15) when the stock was below $90, it fell to $80 by mid-January. After the release of Deep Seek R1 on January 20, Alibaba's revaluation truly began, soaring all the way to around $130 before the earnings report, a price not seen since 2021. During this short month of value revaluation, the sell-side's earnings expectations for the group have seen virtually zero adjustments, with the focus of revaluation primarily on the redefinition of Alibaba Cloud's value.

Alibaba Cloud has experienced a long period of valuation compression, with revenue growth rapidly declining from 40-50% to stagnation, discussions of spin-off listings, and then backtracking on those plans, almost reaching a point of near-zero valuation. Before the Deep Seek moment, Alibaba's revenue guidance for Alibaba Cloud was restored to double-digit growth, with sell-side expectations generally ranging between 10-15% growth.

Currently, Alibaba is around $125 (barely a $300 billion market cap), according to Dolphin's estimates, corresponding to a PS valuation for Alibaba Cloud in fiscal year 2026 of about 5 times, while under conservative assumptions of no profit growth for the Taotian business, it corresponds to about 8 times the 2025 PE.

Therefore, whether Alibaba can break through the $120 barrier and further move towards the core range of $160-180 (approximately $370-400 billion) clearly depends on the future progress expectations of these two major businesses: 1) Key on Alibaba Cloud: According to information obtained by Dolphin Research, the speed at which enterprises deploy DeepSeek is almost a race against time, and the issues encountered during deployment are similar to those faced by ordinary users currently using a DeepSeek mobile application—whether the computational power can meet user demand.

The solution to the problem is either to build private computational power or to rent cloud computational power. As the cloud service provider with a 36% market share, Alibaba Cloud is likely to be the preferred service provider for computational power. Therefore, during this conference call, how Alibaba reorients the market regarding the growth expectations for Alibaba Cloud and explains the profitability guidance for AI cloud will become exceptionally important.

Given Alibaba Cloud's current position in the domestic market, if we consider the lower valuation range of overseas SaaS at around 7 times, simply relying on Alibaba Cloud's valuation, Alibaba has about 10-15% room for growth. However, if the company raises its growth guidance for Alibaba Cloud, for instance, to the range of 30%-40% like its overseas cloud peers, then Alibaba Cloud could see further performance and valuation boosts. Based on a 10X PS calculation, there is still a 30% upside potential for Alibaba's revaluation corresponding to Alibaba Cloud.

2) E-commerce business: This asset still faces two major issues— a. economic cycle downturn; b. decline in industry position; but slightly countering these two factors is its own cycle. Since September last year, Taobao has been gradually improving its monetization rate through a 0.6% technology service fee centered on payment channel fees and the marketing of new tools—full-site push penetration rate has increased, which may help pull the Taotian business out of the profit shrinkage quagmire.

After the new Taotian CEO took office, whether there will be a new investment cycle for Alibaba, Dolphin Research tends to believe it will still be a stable approach, focusing on returning to quality merchants represented by Tmall, utilizing Alibaba Mama to purchase advertising resources across the ecosystem, and emphasizing the shift from daily active users to active buyers. Overall, it still leans towards considering the input-output ratio and monetization efficiency.

Currently, Taotian does not seem to drag down the overall valuation of the group; rather, the valuation is more about a slight recovery from 8 times to 10-12 times, or continuing to hover around 8 times.

3) Shareholder returns: At the current price level, Dolphin Research estimates that the shareholder return from dividends and buybacks should be around 5%, which is basically a safe price level.

After sorting out these three important contradictions, we can roughly conclude that although there will be many profit-taking actions after a short-term stock price surge of 60%, this strong performance will prompt the market to continue re-evaluating Alibaba Cloud upwards. However, according to Dolphin Research's current valuation, for the stock price to break through the $200 range, it will be difficult to achieve solely by simple valuation increases; instead, it needs to return to "hard work"—improving the fundamentals of the e-commerce business and significantly boosting the growth rate of the cloud business.

The following is a detailed performance analysis:

1. New Reporting Standards for Alibaba's Financial Reports

Starting in June 2023, Alibaba Group has significantly adjusted the reporting standards for its financial disclosures. Below are the latest reporting standards for better understanding of subsequent analyses:

TaoTian Group: Taobao, Tmall, Tmall Supermarket + direct import; domestic wholesale;

International Group: Cross-border retail AliExpress, cross-border wholesale international station, overseas local retail Lazada, Trendyol, etc.;

Local Life: Ele.me and Amap

Cainiao Group: Same as before, but now the revenue accounting method treats other businesses within Alibaba Group as clients, and the revenue generated by them is included in Cainiao's revenue;

Intelligent Cloud Group: Alibaba Cloud, DingTalk was reclassified into other business categories in Q3 2023;

Pan-Entertainment Group: Youku and Alibaba Pictures;

All others: Gaoxin (rumored to be sold), Hema, Alibaba Health, Intime (these three belong to self-operated new retail with offline formats, originally in domestic commerce business); Lingxi Interactive, UC, Quark (originally in pan-entertainment business), Fliggy (originally in local life business), DingTalk (originally in cloud business).

II. CMR and profit double beat, is TaoTian officially back to growth?

Although the macro social retail data for Q4 2024 shows that the overall growth rate of online physical retail has decreased from 6.2% to 3.5%, indicating that the overall growth of the e-commerce market is marginally weakening. However, the Q4 performance guidance previously released by Alibaba and JD.com generally shows improvement compared to Q3, with the market expecting TaoTian Group's CMR growth rate to improve from 2.5% in Q3 to 5%~6%. In fact, the domestic retail customer management revenue (CMR) for this quarter grew by 9% year-on-year, stronger than the consensus expectation of recovery.

Although the company still has not disclosed GMV or order growth , based on the company's previous qualitative descriptions and market expectations, we believe that the GMV growth for this quarter should be roughly in line with the overall market.

Therefore, the stronger-than-expected CMR growth is mainly attributed to the 0.6% service fee charged at the beginning of September and the promotion of advertising tools across the site, which positively impacted TaoTian's monetization rate and was fully released this quarter. The continuous acceleration of CMR growth for three consecutive quarters since FY25 confirms the trend of TaoTian's take rate stopping its decline and rebounding. Looking ahead to the next few quarters, due to the further release of the aforementioned two positive effects, it is not ruled out that TaoTian's take rate may have further room for increase, but the pace of improvement may slow down.

In addition to the significant improvement in CMR growth, TaoTian's profit performance this quarter is also quite good. This quarter's adjusted EBITA is 61.1 billion, with a year-on-year positive growth of 2%. In contrast, the median expectation of the sell-side has decreased by approximately -2% year-on-year, which is significantly better. However, we also note that JP Morgan had expected Taotian's profit to grow by 6% year-on-year before the performance, and we believe that a considerable amount of capital should have been aware of this news, so the actual 2% growth may be in line with expectations compared to the buy-side's expectations. Combined with the significantly higher-than-expected marketing expenses this quarter, it should still have a certain drag on profitability.

3. Self-operated retail continues to streamline and refine

In Taotian Group, the self-operated retail business saw a year-on-year revenue decline of 9.2% this quarter, with the decline widening compared to the previous quarter and falling short of market expectations. Logically, the positive effects of national subsidies should have contributed more significantly to Taotian's self-operated retail during the 4Q promotional season, but the actual growth rate further declined. According to the company's explanation, this is mainly due to the impact of actively shrinking and divesting some businesses.

The oldest 1688.com wholesale business, as a major focus of Taotian's "cost-performance" strategy, saw a year-on-year revenue growth of 23.9% this quarter, with growth continuing to accelerate due to the transformation to a B2C model and as a source of supply for cross-border e-commerce.

Overall, due to the unexpectedly strong performance of CMR, Taotian Group's overall revenue grew by 5.4% year-on-year this quarter, significantly better than the market expectation of 2.1%. This can be seen as a strong signal of Taotian Group's formal growth accelerating again.

4. Alibaba Cloud officially moves towards double-digit growth, the future is bright

Since January 13, under the "DeepSeek Moment" leading the revaluation of Chinese AI assets, Alibaba has risen nearly 50% from its low. This revaluation has mainly focused on the reassessment of Alibaba Cloud's business and the potential for future performance. This quarter, Alibaba Cloud achieved revenue of 31.7 billion, with a year-on-year growth rate of 13%, continuing to improve from last quarter's 7.1%, and significantly better than the market consensus expectation of 9.7%. Although the actual expectations of the buy-side may have risen to over 10% in the recent increase, the 3 percentage point beat is considered a relatively satisfactory figure for the buy-side according to Dolphin Research. The company disclosed that revenue generated from AI-related demand has maintained triple-digit growth for six consecutive quarters, and this better-than-expected cloud growth rate will clearly enhance market expectations for accelerated cloud growth in the future. From a profit perspective, Alibaba Cloud's adjusted EBITA profit reached 3.14 billion this quarter, exceeding the expected 2.83 billion. The adjusted EBITA profit margin increased by 0.9 percentage points quarter-on-quarter. According to the company, the acceleration in profit margin is still due to improvements in product sales structure and proactive contraction of low-quality businesses.

As the core of this Alibaba revaluation (more important than the Taotian business), the dual beat of Alibaba Cloud's revenue and profit will undoubtedly drive the market further towards optimism.

Five, international e-commerce growth and losses both expand, unafraid of geopolitical risks

This quarter, international e-commerce revenue grew by 32.4% year-on-year. It did not slow down as the market expected, but instead accelerated quarter-on-quarter, better than the expected growth rate of 26.8%. The growth rate of international retail business was roughly consistent with the previous quarter, but the growth of international wholesale business increased from 9.4% to 18% quarter-on-quarter, driving overall growth.

However, corresponding to the accelerated growth, the losses in the international segment also expanded to 5 billion, higher than the 3 billion+ losses expected by the market and last year's same period. The loss rate also expanded by about 2 percentage points year-on-year.

According to the company, during the 4Q consumption peak season, the company increased investment and customer acquisition efforts in regions such as Europe, which led to the phenomenon of simultaneous growth and loss expansion.

Six, revenue decline of Cainiao under business adjustments

This quarter, Cainiao's revenue growth unexpectedly fell to a negative growth of 0.8%, which was outside market expectations. Such a significant and unexpected fluctuation in growth is clearly influenced by special events. Combined with previous news reports, Cainiao has reallocated some of its original platform-type business to Taotian and the international e-commerce group, which should be the main reason for this negative revenue growth. Therefore, the growth increase of the previous international e-commerce group (which should have some impact from Taotian) should also be influenced by this business reallocation.

Due to the high capital expenditure required for cross-border logistics and the divestment of high-margin platform-type businesses, Cainiao's adjusted EBITA this quarter was 240 million, significantly lower than the market expectation of 370 million and last year's level.

Seven, local services losses expand, competition intensifies

Alibaba's local services performance this quarter was slightly below expectations, with revenue growth of 12.1%, showing a slight slowdown quarter-on-quarter, not meeting the market expectation of 13.5%. At the same time, losses also significantly expanded quarter-on-quarter to 600 million, higher than the expected loss of 520 million. Combining these two indicators, it seems that there are signs of a deteriorating competitive environment. **

With JD.com recently announcing its entry into the food delivery and ride-hailing businesses, the competitive environment is expected to intensify further.

Eight, the entertainment and "N" companies are turning losses into profits and reinvesting again?

Other relatively marginal large entertainment and other "N" companies have generally aligned with revenue and market expectations this season, but a commonality is that the extent of losses has further widened. The large entertainment sector reported a loss of 310 million this season, higher than last season's 180 million and market expectations. The overall losses for the "N" companies reached 3.16 billion, nearly doubling compared to the previous quarter's losses and significantly exceeding the expected loss of 1.74 billion. While the performance trends of core TaoTian and Alibaba Cloud have improved, the "courage" to invest in relatively marginal assets seems to have increased as well.

Nine, dragged down by the expanded losses of most businesses outside of TaoTian and Alibaba Cloud, the group's overall profit slightly exceeded expectations.

Overall, due to the generally accelerated and exceeding expectations revenue growth of the three key areas: TaoTian, Alibaba Cloud, and international e-commerce, other segments, except for Cainiao which significantly missed expectations due to business adjustments, largely met expectations. Alibaba Group's overall revenue grew approximately 5.4% this season, significantly accelerating quarter-on-quarter and notably higher than the expected 2.1%.

In terms of profit, Alibaba Group's adjusted EBITA was 54.9 billion, slightly above the market expectation of 53.6 billion. Although there has been significant improvement in the growth of key business segments, the main TaoTian Group's profit did not exceed expectations significantly, likely due to increased marketing investments. In other segments, except for Alibaba Cloud which showed an improving profit margin, most others have seen their losses widen this season, likely due to increased investment efforts. Therefore, the profit performance was not significantly above expectations.

Ten, marketing expenses significantly exceeded expectations, is Alibaba launching another growth battle?

From the perspective of costs and expenses, this quarter Alibaba's gross profit margin, excluding stock-based compensation, increased by a full 1.7 percentage points compared to the same period last year. With the active divestment of inefficient assets and the improvement in profit margins of TaoTian and Alibaba Cloud businesses, the group's gross profit margin continues to show an upward trend.

In terms of expenses, excluding stock-based compensation, this quarter's marketing expenditure reached 42.7 billion, an increase of nearly 9 billion compared to the same period last year, and significantly higher than the market expectation of 37.2 billion. Such a substantial increase in marketing expenses indicates that Alibaba's overall spending on customer acquisition and subsidies has indeed seen a noticeable increase, which is one of the main reasons why the profit performance this quarter is not as impressive as the growth side.

With investments in AI and related functions, R&D expenses also grew by 22% year-on-year, but within market expectations. Administrative expenses, on the other hand, saw a nearly 2% decline, with actual spending being less than market expectations. Combined with the continued decline in employee numbers, it is evident that Alibaba's internal cost control efforts remain quite strong.

For past analyses of Alibaba by Dolphin Research, please refer to:

Earnings Season:

Interpretation on November 16, 2024 “ Has Taotian squatted too long, can Alibaba jump again? ”

Minutes from November 16, 2024 “ Alibaba: When will the turning point for Taotian come (2Q25 Conference Call) ”

Interpretation on August 16, 2024 “ Big brother Taotian dropped the ball, little brother supports half of Alibaba ”

Minutes from August 16, 2024 “ Alibaba: When will Taotian improve, when will the little brother be profitable ”

Interpretation on May 15, 2024 “ Aggressive investment + aggressive cuts, has Alibaba's "major surgery" really revived? ”

Minutes from May 15, 2024 “ Alibaba: Investment has begun to show results, subsequent profits will gradually catch up ” Interpretation on February 8, 2024: Alibaba Minutes: Focus on Taotian, Overseas, and Cloud Investments, Buying Alibaba is a Stable Victory Over US Bonds ****

Interpretation on February 8, 2024: Alibaba: Scraping Corruption, Exposing Bones, Can It Survive After Major Surgery?

Interpretation on November 17, 2023: "Late Twilight" Alibaba: The Road Back is a "Long March"

Minutes on November 17, 2023: Alibaba: Not Playing the "Split Listing" Technical Game, Focus on Investing in Organic Growth

Interpretation on August 11, 2023: Quit the "Big Pot Rice," Alibaba "Turning Back is the Shore"

Minutes on August 11, 2023: Alibaba: Expanding User Scale is the Primary Goal, Continue to Invest

Interpretation on May 19, 2023: Always Grinding the Bottom Without Seeing Light? Alibaba is Really Going to Fight This Time! Minutes of May 19, 2023 “After restructuring, Alibaba is set to make big moves for another three years”

In-depth:

December 28, 2023 “The Fall of the Internet Gods: Who Killed Alibaba, Meituan, JD.com, and Tencent?”

October 10, 2023 “Against the Wind: Can Alibaba, JD.com, and Meituan Turn the Tide?”

January 19, 2023 “Ant Group Goes Public, Daniel Zhang Goes Cloud: How Far is Alibaba from Revaluation?”

January 18, 2023 “The Final Battle of E-commerce: Can Taobao Compete with Douyin?”

January 18, 2023 “A Major Turnaround: Alibaba, Ctrip, and Didi's Counterattack”

Hot Topics:

June 5, 2024 “Learning from Alibaba's 'Price Cap Bullish' Buyback: Can It Really Get Cheap Money and Prevent Dilution?”

January 10, 2024 [“Years of Efforts Resulting in 'Nothing': What Has Alibaba Invested In?”](https://longportapp.cn/zh-CN/topics/11034990? app_id=longbridge&channel=t11034990&invite-code=276530&utm_source=longbridge_app_share)

November 17, 2023 “Alibaba: Plummeting, Reducing Holdings, Changing Stance, Spending Money? Here’s My Take”

September 20, 2023 “TaoTian: Shedding Burdens, Where to Aim?”

Risk Disclosure and Statement of This Article: Dolphin Research Disclaimer and General Disclosure