Alibaba's earnings report is out, and the stock is dropping rapidly in pre-market. Is this reasonable?

From the pre-market reaction, it's clear that the market is not satisfied with Alibaba's financial performance this quarter. In terms of big numbers, total revenue grew 6.6% YoY, 0.6pct lower than market expectations (mainly due to lower revenue from Cainiao and international e-commerce, as well as the divestment of Sun Art and Intime). As for profits, the key metric—group adj.EBITA—only met expectations. In other words, there were no standout performances in either growth or profits.

Breaking it down by business segment:

1. The core Taotian Group performed well this time. CMR grew 11.8%, and adj.EBITA rose 8.4% YoY. Although Bloomberg's consensus expectations were too low to be meaningful, even compared to the more credible JP Morgan expectations of 10% CMR growth and ~7% EBITA growth, Taotian's results still exceeded expectations. This is similar to JD.com's solid performance earlier. The main driver is likely the continued positive impact of monetization tools like Quanzhan Tui on take rates.

2. However, outside of Taotian, other segments each have their own issues. First, Alibaba Cloud, the second most important business, saw growth accelerate to 17.7%, but compared to the market's median expectation of 16.8% and the more optimistic investors' hope for 20%, this isn’t a big beat. Meanwhile, high capex is clearly dragging on profits, with adj.EBITA margins 1.5pct lower than expected and a noticeable QoQ decline. This is a case of decent growth but a miss on profits.

3. As for the less critical segments, each has its own problems. International e-commerce grew below expectations while also failing to deliver better-than-expected loss reductions. Cainiao saw declines in both revenue and profits due to partial business divestments to sibling groups. Local services also unexpectedly posted a quarterly loss of 2.3 billion yuan in 1Q, theoretically before the food delivery wars even began.

Given that the stock had already rebounded to $130 before the earnings report, recovering most of the tariff-related losses, it wasn’t at a low point. Against this earnings backdrop, a short-term drop seems reasonable.$Alibaba(BABA.US) $BABA-W(09988.HK)