AI needs a 'bloodletting' before revival, is Alibaba 'unwilling' to fight again?

After experiencing a surge driven by the China AI story, a plunge due to the US-China trade dispute, and a rebound from the recent easing of tensions, Alibaba's stock price has returned to around $130, the starting point before last quarter's explosive performance. How did $Alibaba(BABA.US) perform this time? From the perspective of expectation differences, overall revenue and profit were relatively flat, and the stock price fell accordingly. For details, please see the core information below:

1. Dual excellence in revenue and profit, Taotian is the biggest highlight of this season's performance

Considering that the growth rate of overall online physical retail sales improved from 3.5% in 4Q to 5.7% in 1Q, and JD's mall business also performed well, Bloomberg's sell-side expectation of a slowdown in Taotian's CMR growth this season is obviously too conservative or outdated and not of reference value. The more realistic CMR growth expectation is about 10%.

This season's CMR actually grew by 11.8%, even compared to the above higher and more "accurate" expectations, it still beat. On one hand, the e-commerce industry as a whole grew well in 1Q driven by national subsidies, and on the other hand, at the Taotian level, the benefits of the additional 0.6% service fee and the full-site advertising tool are clearly further released, promoting the take rate increase.

Similarly, Bloomberg's expectation of a 2.1% year-on-year growth in adj. EBITA profit is obviously too low, and the actual adj. EBITA for Taotian this season was 41.8 billion, a year-on-year increase of about 8%, compared to JPM's more accurate expectation of 7% , it is also a good beat. It reflects the rise in Taotian's monetization rate, which naturally has a positive impact on profits. Taotian Group's profit margin compared to the same period last year only slightly decreased by 0.1pct, marking the end of the profit margin decline cycle caused by business adjustments, monetization rate decline, and expanded investment.

2. Alibaba Cloud accelerates as expected, but at the cost of a significant decline in profit margin

As one of the most direct beneficiaries of this round of domestic AI stories, the market has fully agreed on the re-acceleration of Alibaba Cloud's growth, with a median sell-side expectation of about 17%, and some optimistic sell-side or investor expectations reaching around 20%. In actual performance, this season's Alibaba Cloud business revenue was 30.1 billion, a year-on-year increase of 17.7%, although it did accelerate as expected, it clearly did not significantly exceed the investor's expectation range.

What makes the problem look worse is that while revenue growth did not significantly exceed expectations, Alibaba Cloud's profit margin this quarter declined more severely than expected. This season's actual adjusted EBITA profit was 2.42 billion, with a profit margin decreasing by 1.9pct quarter-on-quarter, 1.5pct lower than market expectations.

On one hand, the first quarter of the natural year (due to the impact of the Spring Festival) is historically the seasonal low point for Alibaba Cloud's profit margin; on the other hand, Alibaba's capex exceeding 30 billion last quarter will undoubtedly drag down the profit margin from depreciation and other aspects. Therefore, the quarter-on-quarter decline in profit margin is undoubtedly a reasonable phenomenon, but the extent of the decline is significantly higher than market expectations.

In addition, this quarter's cash capex expenditure was 24 billion, significantly lower than last quarter's 31.3 billion. And based on an annualized quarterly expenditure of 24 billion, it is clearly lower than the company's management's previous guidance of an average annual capex of over 120 billion for the next three years. The low capex expenditure may also be interpreted by investors as the company not being as optimistic about future AI demand, or having certain difficulties in acquiring chips. (Of course, the actual reason may not be so, pay attention to the management's views). Therefore, overall, Alibaba Cloud's performance this time is marginally negative.

3. International e-commerce growth slows more than expected, no highlights in loss reduction

Although Trump's counter-tariffs will inevitably have some impact on international e-commerce, considering that Lazada and Trendyol are localized overseas e-commerce, and AliExpress's GMV share in the US is relatively low (should be less than 10%), theoretically, the impact of Trump's tariffs should not be significant, so the market's expectation for Alibaba's international e-commerce revenue growth is 27.4%, a 5pct slowdown quarter-on-quarter. But in fact, this season's international e-commerce revenue grew by 22.3% year-on-year, slowing down by a full 10pct quarter-on-quarter, much worse than expected. The announcement explained that the drag was due to exchange rate losses from converting overseas revenue into RMB.

If the slowdown in growth can correspond to a significant reduction in losses, it can be explained as the company actively reducing the expansion scale under external policy risks, focusing more on profits. But in fact, the international e-commerce business's adj. EBITA loss this season was 3.6 billion, although the loss did narrow both year-on-year and quarter-on-quarter, it was still higher than the market's expected loss of 3.4 billion. That is, there were no highlights in loss reduction either.

4. Local life losses increase significantly, the impact of the food delivery battle comes early?

Alibaba's local service revenue grew by 10.3% this quarter, slightly down by 1.8pct quarter-on-quarter, and the growth trend is still relatively stable. But the problem is that the local life department's loss this season greatly exceeded expectations (-660 million) and reached 2.32 billion. Although the first quarter is indeed the seasonal low point for profits within a year, compared to the single-quarter loss of less than 600 million in the first three quarters of fiscal year 25, the significantly increased loss this season is clearly not explainable by seasonality. Moreover, in the first quarter, the food delivery subsidy battle led by JD had not yet fully unfolded, and the loss of local life had already expanded in advance, which will obviously make the market worry that the losses in the next few quarters will be more severe.

5. Cainiao continues slow growth, the impact period of platform business spin-off is still ongoing

Due to the impact of the spin-off of some platform and fulfillment businesses from Cainiao to the corresponding departments of Taotian and the international e-commerce group starting last quarter, Cainiao's revenue this quarter fell significantly by -12% year-on-year. This alone caused about 3.5 billion in revenue miss, which is the main culprit for Alibaba Group's overall revenue being below expectations this season. From another perspective, it also means that the actual growth rate of the international e-commerce group, which took away a lot of revenue from Cainiao, is even worse this season.

Meanwhile, Cainiao's loss this season was 610 million, although the loss rate narrowed by 2.7pct compared to the same period last year. But compared to the market's expected profit of 150 million, it is also far from expectations.

6. The impact of selling Sun Art Retail and Intime Department Store is reflected, dragging down revenue growth

In addition, the impact of the previously announced sale of Sun Art Retail and Intime Department Store was reflected this season, causing the revenue growth of other businesses to slow significantly from 13% last quarter to 5% this season, which is also one of the main reasons for Alibaba Group's overall revenue growth not increasing but decreasing quarter-on-quarter this season.

7. Each business has its own problems except for Taotian, the overall performance of the group is flat

Although Taotian's revenue was unexpectedly strong this season, due to the significant drag of businesses such as international e-commerce and Cainiao, as well as the impact of the spin-off of Intime and Sun Art Retail on revenue size, Alibaba Group's revenue grew by 6.6% year-on-year this season, slowing by about 1pct quarter-on-quarter, and slightly lower than expectations by 0.6pct, with a flat performance.

In terms of profit, although Taotian's profit growth exceeded expectations, the significant losses of Alibaba Cloud, Cainiao, and especially the local life business, made Alibaba Group's adj. EBITA profit of 32.6 billion this season only in line with expectations. From a year-on-year perspective, due to the low base in the same period last year, the profit grew by 35.5% year-on-year, which is not bad in absolute terms, but there are no highlights compared to expectations.

8. Marketing expenses greatly exceed expectations, the local life subsidy battle is already reflected

In terms of costs and expenses, Alibaba's gross profit after excluding stock-based compensation grew by 22% year-on-year this quarter, and the gross profit margin also increased by 4.9pct year-on-year. Although the revenue growth this season is not outstanding, the gross profit performance is still impressive. Mainly because on one hand, the base in the same period last year was too low, and on the other hand, it is the result of the company's active spin-off of inefficient self-operated assets, the acceleration of Taotian Group's monetization rate, and the overall efficiency improvement of the group.

In terms of expenses, worth noting is that this season's marketing expenses (excluding stock-based compensation) reached 35.5 billion, with a year-on-year growth rate of 26.5%, significantly higher than market expectations. Marketing expenses have maintained a high growth rate of over 26% for three consecutive quarters, significantly outpacing the growth rate of revenue and gross profit in the same period, indicating that Alibaba Group is currently in an expansion phase. Combined with the performance of each segment this season, the significantly higher-than-expected marketing expenses are likely used in the local life business, where losses have expanded significantly.

Overall, although due to more marketing expenses, the three expense rates widened by about 1.9pct year-on-year, the profit margin still increased significantly this season due to the gross profit margin expansion of as much as 4.9pct year-on-year.

9. Shareholder returns

According to the disclosure, Alibaba repurchased shares worth about $600 million this quarter, and announced a $4.6 billion annual dividend for fiscal year 25. So the total buyback + dividend for the entire fiscal year 25 is $16.4 billion, which is equivalent to about a 5.8% shareholder return rate compared to Alibaba's current market value of about $282 billion. However, it should be noted that Alibaba's average quarterly buyback strength of $3.7 billion in the first three quarters of this fiscal year was conducted when the company's stock price was between $70 and $90. As Alibaba's stock price is currently fluctuating around $120, the strength of subsequent buybacks should be less.

Dolphin Investment Research View:

Overall, Alibaba's performance this time is not very bad from an absolute perspective. Among the two core businesses, Taotian Group's revenue and profit growth have both improved marginally. Alibaba Cloud's revenue growth has also continued to accelerate driven by AI, accelerating from single-digit growth a few quarters ago to nearly 18%. Under last year's low base, the group's overall adj. EBITA profit growth rate is as high as 35%, with overall stable revenue growth and significant profit improvement, which is commendable.

But at the same time, Alibaba's problems this time are not few. First, the decline in Alibaba Cloud's profit margin is more severe than expected; the international e-commerce business's revenue growth has slowed significantly, and there is no outstanding performance in loss reduction; the local life segment's loss has expanded significantly to over 2 billion, and the food delivery battle has not yet started, but the loss has already expanded significantly. These are also unavoidable problems.

And the problem is also that before the earnings release, Alibaba's stock price was already above $130, far from the long-term hovering below $100. At a price and valuation that is not low, it cannot be simply attributed to the market's unreasonably high expectations for Alibaba. Higher prices naturally match higher requirements.

So how should we view Alibaba's investment value now, with the stock price having experienced a roller coaster ride and currently fluctuating between $120 and $130? Dolphin Investment Research believes:

1) Alibaba Cloud: After several months of fermentation, the market's near-frenzied optimism about AI when DeepSeek was first born has gradually returned to rationality. The re-acceleration of Alibaba Cloud's growth driven by AI demand has also become a market consensus. The current market's expectation for the valuation of the cloud business is generally based on a revenue growth of about 17% to 20% in fiscal year 26, and a valuation of 4x to 5x P/S.

We do not judge whether this valuation and expectation are too low or too high. From another perspective, the stage where "Alibaba Cloud is the biggest beneficiary of the AI era" alone can attract investors has obviously passed. For Alibaba Cloud's valuation to go further, it needs to actually beat the market's current expectations, prompting the market to raise expectations and then beat the new expectations, thereby forming a cycle of continuously raising performance expectations and further valuation expansion. For example, if Alibaba Cloud's revenue growth in fiscal year 26 actually reaches 30%, further prompting the valuation to rise to 7x P/S, it can bring an overall incremental valuation of about $48 billion, or nearly $20 per share, based on current expectations.

Then, obviously, Alibaba's performance this quarter is not enough to form the above-mentioned positive cycle of continuously promoting the market to raise expectations and then continuously beating them. Of course, from a long-term perspective, the domestic AI story is still in its infancy, and there is still considerable space in the future. This quarter's nearly 18% revenue growth in the cloud business may be the lowest point for a period of time in the future. Dolphin is still optimistic about the long-term trend of Alibaba Cloud. But the problem is that the market itself cannot clearly predict the subsequent growth rate of the cloud business, and it needs to be verified by the company's performance. Therefore, although we are logically optimistic, we must wait for Alibaba Cloud to deliver performance that guides expectations upward in the next or subsequent quarters.

2) E-commerce business: As for the previously "difficult" Taotian business, the market's expectations for this asset before the performance release are still not high. On one hand, Taotian Group's performance this quarter is indeed good, reflecting the benefits of technical service fees and new marketing tools being released, with monetization rate, CMR growth, and profit margin all bottoming out and rebounding. But another problem is that the benefits of national subsidies cannot exist permanently, and the growth ceiling of the e-commerce industry is likely to remain only in the mid-to-high single digits in the future; while Taotian's market share may slow down in decline, whether Taotian's market share and competitive landscape will truly stop falling and rebound, and when, is still an unknown.

Therefore, for this business, the market and Dolphin's expectations are generally "not dragging down" is good enough, maintaining mid-to-high single-digit revenue growth and slightly higher profit growth, maintaining the current valuation level. It is enough not to drag down the group's overall valuation when the AI cloud business raises the group's overall valuation. Then this performance should meet this requirement.

As for whether the market's current valuation of only 8x PE for the e-commerce industry is reasonable and whether there is room for upward revision? In absolute terms, 8x is obviously very low and theoretically has room; but the problem is that even with relatively better performance growth, peers are also valued at this level, unless there is a revaluation of the entire industry, or even the entire Chinese concept assets, Dolphin does not have too much expectation for this.

3) The problems of international e-commerce and local life: In addition to the two core businesses mentioned above, Alibaba's performance this time also exposed two new problems. One is that the international e-commerce business seems to be more affected by the recent tariff turmoil than expected. Although the recent dispute has eased somewhat, in the medium to long term, trade negotiations between China and the US, as well as with other countries, are unlikely to end so simply. Policy shocks are likely to always exist. So in the case of business scale growth being affected, at least it needs to achieve significantly better-than-expected loss reduction and profitability.

Another is the competition in the food delivery and entire instant retail market led by JD, which we also believe is not a "short-term battle" that can be completed in a few quarters. It is likely that the competition between Taobao Flash Sale + Ele.me, JD, and Meituan will continue for a long time. And this quarter, before the battle has really started, the loss of local life has expanded so much, it is hard not to worry about the degree of loss in the future.

4) In summary, Dolphin's current expectation for Alibaba is that Alibaba Cloud can continue to deliver better-than-expected performance, driving the group's overall market value upward; Taotian Group can maintain its current good and stable performance, not seeking too much brilliance, but not dragging down; as for other small businesses, at least they should not cause too significant a drag on the group's overall profit. In this scenario, Alibaba still has opportunities in the medium to long term.

The following is a detailed analysis of the performance:

1. Alibaba's new financial report caliber

Alibaba Group made significant adjustments to the caliber of financial report disclosure in June 2023, and the following is the latest financial report caliber to help everyone understand the subsequent analysis:

1) Taotian Group: Taobao, Tmall, Tmall Supermarket + import direct sales; domestic wholesale;

2) International Group: cross-border retail AliExpress, cross-border wholesale International Station, overseas local retail Lazada, Trendyol, etc.;

3) Local life: Ele.me and Gaode

4) Cainiao Group: the same as before, but now the income calculation method includes other businesses within Alibaba Group as customers, and the income they generate is included in Cainiao's income;

5) Intelligent Cloud Group: Alibaba Cloud, DingTalk was spun off into other business categories in the September 2023 quarter;

6) Pan-entertainment Group: Youku and Alibaba Pictures;

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

2. Big brother Taotian performs brilliantly, becoming Alibaba's pillar again

Due to the improvement in the growth rate of overall online physical retail sales from 3.5% in 4Q to 5.7% in 1Q, and the significant improvement in the growth rate of JD's mall performance previously released, Bloomberg's sell-side expectation of a slowdown in Taotian's CMR growth this season is obviously too conservative or outdated and not of reference value. Taking JPM's expectation as an example, the more realistic growth expectation is about 10%.

This season's CMR actually grew by 11.8%, even compared to the "real" market expectation represented by JPM, it is still better. We believe this is due to the good growth of the e-commerce industry as a whole in 1Q driven by national subsidies, and the further release of the benefits of the additional 0.6% service fee and the full-site advertising tool at Taotian itself.

Similarly, Bloomberg shows that the sell-side expectation of only a 2.1% year-on-year growth in Taotian's adj. EBITA this season, which is almost flat compared to last season's expectation, is also too conservative, JPM's approximately 7% profit growth is more valuable for reference. The actual adj. EBITA for Taotian this season was 41.8 billion, a year-on-year increase of about 8%, also beating the relatively higher JPM expectation. It also conforms to the logic of the high marginal profit rate brought by the increase in Taotian's monetization rate. In short, Taotian Group's performance this season is excellent, with both revenue and profit exceeding expectations.

3. Self-operated retail continues to streamline and purify, performing well

The self-operated retail business within Taotian Group continued to decline by nearly 1% year-on-year this season, mainly due to the ongoing impact of the company's proactive contraction and spin-off of some non-premium businesses for several quarters. But as it gradually enters the low base period of last year, the decline this season has significantly narrowed, and it should continue to ease and return to positive growth in the next few quarters.

The oldest 1688.com wholesale business, as one of the current main footholds of Taotian's "cost-effective" strategy, continued to maintain a high growth rate of 17% year-on-year this quarter. According to the company, the additional service fees added to paid members are the main contribution.

Overall, due to the unexpectedly strong performance of CMR, Taotian Group's overall revenue grew by 8.7% year-on-year this quarter, significantly better than the market expectation of 4.9% (of course, this expectation is low), Taotian can be said to be the brightest segment this quarter.

4. Alibaba Cloud accelerates as expected, but at the cost of a higher-than-expected profit margin contraction

Since "Alibaba Cloud is one of the biggest beneficiaries of AI" is already a market consensus, the median market expectation for Alibaba Cloud's growth rate before the performance release is about 17%, and some optimistic sell-side or investor expectations are as high as about 20%. In actual performance, Alibaba Cloud's business revenue was 30.1 billion this season, a year-on-year increase of 17.7%, although it did accelerate significantly as expected, the extent of exceeding expectations is not enough. It may not be enough to stimulate the market to imagine Alibaba Cloud's future growth space more optimistically.

And what may make investors more worried is that while revenue growth did not significantly exceed expectations, Alibaba Cloud's profit margin this quarter declined more severely than expected. This season's actual adjusted EBITA profit was 2.42 billion, with a profit margin decreasing by 1.9pct quarter-on-quarter, also 1.5pct lower than market expectations.

Before the performance release, the market's views on the change in Alibaba Cloud's profit margin were quite divided. Some believed that scale effects could bring the profit margin to remain flat at a high level quarter-on-quarter, while others believed that high capex would inevitably lead to a slight decline in profit margin.

Dolphin Investment Research believes that the reasons for the decline in profit margin this season are: first, due to the impact of the Spring Festival holiday in the first quarter of the natural year, Alibaba Cloud's profit margin is historically the seasonal low point in this season, and the high capex of over 30 billion last quarter will also drag down the profit margin to some extent. Therefore, the quarter-on-quarter decline in profit margin is reasonable, but the extent of the decline seems to be significantly higher than market expectations.

Overall, although the cloud business did accelerate as expected under the AI benefits, the growth side is not impressive, and the profit margin declined more than expected, leaving an overall negative impression. In addition, this quarter's cash capex expenditure was 24 billion, significantly lower than last quarter's 31.3 billion, and also lower than the company's management's previous guidance of an average quarterly expenditure of over 120 billion for the next three years. The low capex expenditure may also be interpreted by investors as the company not being as optimistic about future AI demand. (Of course, the actual reason may not be so, pay attention to the management's views)

5. Under the impact of tariffs, the decline in international e-commerce growth is greater than expected, and there are no highlights in loss reduction

Although the market has expected that the revenue growth of international e-commerce will slow down due to Trump's counter-tariffs, the international e-commerce revenue grew by 22.3% year-on-year this season, slowing down by a full 10pct quarter-on-quarter, which is worse than the market expectation of 27.4%. Since Alibaba's subsidiaries such as Lazada and Trendyol are more localized overseas e-commerce, theoretically, they should not be greatly affected by Trump's tariffs, so the market's expected decline in growth rate is relatively low, but the actual situation is much worse than expected. The announcement explained that the drag was due to exchange rate losses from converting overseas revenue into RMB.

6. Under the impact of business spin-off, Cainiao's revenue negative growth expands

Cainiao's revenue fell by -12% year-on-year this quarter, mainly due to the impact of the spin-off of some platform and fulfillment businesses from Cainiao to the corresponding departments of Taotian and the international e-commerce group starting last quarter. This alone caused about 3.5 billion in revenue miss.

At the seasonal low point of profit margin, Cainiao's loss this season was 610 million. Although the loss rate narrowed by 2.7pct to 2.8% compared to the same period last year, the market's expectation reference is the quarter-on-quarter rather than the year-on-year profit margin level, and the market expected Cainiao's profit margin this season to be +0.6% (close to last quarter). Therefore, from the perspective of expectation difference, Cainiao's profit is also below expectations.

7. Before the food delivery battle, local service losses have already expanded significantly

Moreover, in the first quarter, the food delivery subsidy battle led by JD had not yet fully unfolded, and the loss of local life had already expanded in advance. This will obviously make the market worry that the losses in the next few quarters will be more severe.

8. Other "marginal businesses" perform better instead

Other relatively marginal big entertainment and other "N" companies, their revenue this season is slightly better than expected. Among them, other businesses recorded the impact of the sale of Sun Art Retail and Intime Department Store this season, and the revenue growth slowed significantly from 13% last quarter to 5% this season. But it is still slightly better than the market's expectation of nearly zero growth.

In terms of profit, the big entertainment segment turned a small profit of 40 million this season, which is also better than expected. The "N" companies as a whole lost 2.54 billion, with a loss rate of 4.7%, 0.3pct lower than expected, also slightly better than expected.

9. Overall revenue growth and profit performance are flat

At the same time, in terms of profit, although Taotian Group's profit growth exceeded expectations, the significant losses of Alibaba Cloud, Cainiao, and especially the local life business, made Alibaba Group's adj. EBITA profit of 32.6 billion this season only in line with expectations. From a year-on-year perspective, due to the low base in the same period last year, the profit grew by 35.5% year-on-year, which is not bad in absolute terms, but there are no highlights compared to expectations.

The following are the adj. EBITA segment profit situations not separately illustrated in the previous text, so they will not be repeated one by one.

10. Marketing expenses greatly exceed expectations, the local life subsidy battle is already reflected

In terms of costs and expenses, Alibaba's gross profit after excluding stock-based compensation grew by 22% year-on-year this quarter, and the profit margin also increased by 4.9pct year-on-year. Although the revenue growth this season is not outstanding, the gross profit performance is still impressive. Mainly because on one hand, the base in the same period last year was too low, and on the other hand, it is the result of the company's active spin-off of inefficient self-operated assets, the acceleration of Taotian Group's monetization rate, and the overall efficiency improvement of the group.

In terms of expenses, excluding the stock-based compensation, worth noting is that this season's marketing expenses reached 35.5 billion, with a year-on-year growth rate of 26.5%, also significantly higher than market expectations. Marketing expenses have maintained a high growth rate of over 26% for three consecutive quarters, significantly outpacing the growth rate of revenue and gross profit in the same period, indicating that Alibaba Group is currently in an expansion phase. Combined with the performance of each segment this season, the significantly higher-than-expected marketing expenses are likely used in the local life business, where losses have expanded significantly.

Another point is that the management expenses after excluding the incentive expenses this season were 9.5 billion, which is 1 billion less than the same period last year, significantly less than the expected expenses, which largely offset the significantly increased marketing expenses.