Wolfishness Returns! The 'Lost' Alibaba, Starting Over

After the performance of the first two companies in the "Takeout Trio," JD.com and Meituan, was considered a bombshell, $Alibaba(BABA.US) also announced its latest quarterly results before the U.S. stock market opened on August 29. Overall, although the losses due to the takeout battle were higher than expected, they were clearly better compared to the profit wipeout of JD.com and Meituan. Apart from this, there were almost no drawbacks, with CMR maintaining solid growth, Alibaba Cloud seeing both growth and margin improvement, and the international e-commerce segment nearly breaking even, exceeding expectations. Overall, the performance was undoubtedly good.

1. CMR maintains over 10% growth: The core metric reflecting the performance of the original Taotian business, CMR grew by 10.1% year-on-year this quarter to 89.3 billion (last year's historical data was adjusted up by about 1 billion, possibly due to the inclusion of Fliggy), although the growth rate slightly slowed compared to the previous quarter, it still maintained a 10% growth rate, slightly exceeding the consensus expectations of sell-side analysts, undoubtedly a good performance (for closely tracking buy-side analysts, it may just meet expectations).

Behind this, on one hand, the overall growth of e-commerce driven by state subsidies improved in Q2 compared to Q1, and on the other hand, the benefits of the 0.6% service fee increase and the full-site advertising tool on Taotian continued to be released.

2. Loss of 15 billion due to takeout investment? Due to another change in Alibaba's financial reporting standards this quarter, the original Taotian Group's business + Ele.me + Fliggy formed a new China e-commerce segment, and the profits of the new segment were disclosed in a package. According to the disclosure, the adj. EBITA of the China e-commerce group this quarter was 38.4 billion, a decrease of about 10.4 billion year-on-year. According to a prediction seen by Dolphin Research from a certain Wall Street firm, it was 39.5 billion, indicating that the losses caused by the takeout battle were higher than expected, but the gap was not very large.

So what is the absolute loss caused by the takeout battle? Apart from estimation, assuming that without the impact of the takeout battle, profits would have grown by 9% year-on-year (slightly lower than the CMR growth rate), then the net loss caused by takeout investment is about 15 billion (in adj. EBITA terms), which is roughly equivalent to the amount deduced from marketing expenses later. This is indeed higher than the 10 billion loss generally expected by sell-side analysts before the earnings release.

3. Alibaba Cloud's growth and profit margins both improved, reigniting AI: Besides takeout, another main line—AI, Alibaba's performance this quarter was quite impressive. Alibaba Cloud's revenue growth rate significantly increased to nearly 26% year-on-year, accelerating by over 8 percentage points quarter-on-quarter. Although before the earnings release, sell-side analysts had already raised their growth expectations for Alibaba Cloud to 20%~25%, the actual performance still slightly exceeded expectations. Apart from the expectation gap, the acceleration in trend is also commendable. It reflects the increase in domestic cloud computing demand driven by AI and Alibaba Cloud's strongest position in the domestic market.

Equally impressive is that Alibaba Cloud's profit margin also improved by 0.8 percentage points quarter-on-quarter, better than market expectations, achieving a profit of 2.95 billion. With the improvement of scale effects, it has gradually offset the impact of a large amount of new Capex on profit margins.

In addition, this quarter's cash Capex expenditure reached 38.6 billion, significantly increasing quarter-on-quarter again, consistent with market rumors before the earnings release. The aggressive Capex investment suggests that Alibaba's management is quite optimistic about the subsequent growth of the AI industry and Alibaba Cloud.

4. International e-commerce profitability in sight? Another core segment that still retains a separate disclosure status—Alibaba's international e-commerce had previously shown a shift towards refined operations, and this quarter's revenue growth rate continued to slow to 18.6% year-on-year, significantly falling from the 30%~40% level of previous quarters. But it brought about a much better-than-expected reduction in losses, with this quarter's loss only 0.6 billion. The management's promise of turning international e-commerce profitable in the new fiscal year has basically been announced in advance, indeed reflecting the results of refined operations.

Dolphin Research speculates that there may be a shift of overseas investment budgets back to the domestic e-commerce and Alibaba Cloud, which are entering an "intense" investment period.

5. Other segments gradually marginalized? This quarter, new additions include Cainiao, Alibaba Entertainment, and AutoNavi, but the other business segment, which was stripped of Intime and Sun Art, achieved revenue of about 58.6 billion, a significant year-on-year decrease of 28%, mainly due to the divestiture of Intime and Sun Art Retail, and the impact of some logistics functions of Cainiao being taken over by the corresponding self-operated retail and international e-commerce at the front end. However, since it has been classified as "other," the reduction in attention and resources is not surprising.

But it is worth noting that this quarter's other business losses increased significantly by 31% quarter-on-quarter to 1.42 billion, and the company explained the reasons, Dolphin Research cautiously suspects that there may be a possibility of classifying the loss-making business lines from other segments (such as international e-commerce) into the less focused "other segments" during the structural adjustment. (Just speculation)

6. Overall performance, mainly due to the impact of divesting Sun Art and Intime, Alibaba's total revenue this quarter was about 247.7 billion, a year-on-year increase of 1.8%, slightly below sell-side expectations, but the gap is not large. Excluding the impact of divestitures, the actual comparable revenue growth was 10%, which is not bad.

In terms of profit, the group's overall adjusted EBITA was 38.8 billion, a year-on-year decrease of about 14%, mainly dragged down by the increase in takeout investment, but partially offset by the profit increase and loss reduction in the Alibaba Cloud and international e-commerce segments. According to Bloomberg's expectation of 43.7 billion, it is clearly too high and not of reference value. The major banks' expectations are between 38 billion and 39 billion, and the actual profit is roughly in line with expectations.

7. In terms of costs, this quarter's gross profit, excluding stock-based compensation expenses, increased by 14% year-on-year, outperforming revenue growth. The profit margin increased by 4.9 percentage points year-on-year, consistent with the increase in the previous quarter, mainly due to the benefits of divesting Intime and Sun Art. Interestingly, the growth of the instant retail business does not seem to have significantly dragged down the gross margin. Dolphin Research believes this may be because the absolute size of the takeout business in the group is still relatively limited this quarter, and Alibaba's investment in takeout is mainly reflected in marketing expenses.

8. In terms of expenses (all on a basis excluding stock-based compensation expenses), the most important marketing expenses this quarter reached 52.7 billion, a significant increase of 20.8 billion compared to the same period last year, exceeding expectations. Combining the financial reports of JD.com and Alibaba in the second quarter, Dolphin Research believes that so far, the two e-commerce companies do not seem to have shown a significant ability to shift the original investment in e-commerce to takeout investment. The continued investment in e-commerce business cannot be significantly reduced.

If we assume that without takeout investment, the original marketing expenses would have increased by 20% year-on-year (25% in the previous fiscal year), then the net increase in marketing investment is about 14 billion, roughly equivalent to the takeout investment intensity deduced from the profits of the China e-commerce group earlier.

9. Shareholder returns: According to the disclosure, Alibaba repurchased shares worth about $815 million this quarter, close to the scale of 600 million in the previous quarter. Compared to the tens of billions of repurchases per quarter in the second half of fiscal year 2023 to the first half of 2024, it is undoubtedly significantly weaker. However, on the one hand, the company's current stock price is not at a low point, and on the other hand, the investment in AI and takeout business is also quite large, so maintaining a small amount of repurchase is at least not a bad thing.

Dolphin Research's View:

Based on the above analysis, the important signals conveyed by Alibaba's performance this quarter mainly include the following points:

1) CMR growth still maintains a growth rate of over 10%, indicating that the performance of the core e-commerce business is good. Whether it is more due to industry benefits or more from the release of monetization rates, it can be clearly stated that Alibaba's core main business has not encountered problems (such as significantly intensified competition again), so Alibaba has the energy and resources to shift to investment in instant retail and cloud business.

2) On another AI main line, although the market had a bit of expectation in advance, the trend of Alibaba Cloud's revenue growth rate and profit margin both improving is undoubtedly an important signal for funds that are bullish on Alibaba's AI story to verify their bullish logic.

3) Although the market's current attention to international e-commerce is not as high (thanks to Trump's tariffs), as an important segment that is still disclosed separately, this quarter's better-than-expected early delivery of guidance for near break-even is also good news for funds that are only willing to value the business when they see profits. (Although there may be an impact of business line reclassification)

4) The only problem is that Alibaba, which joined the battle the latest, still had higher-than-expected investment in the takeout business. But from the performance of JD.com and Meituan, it is indeed reasonable for Alibaba's losses to exceed expectations. Moreover, compared to the other two, Alibaba can bear a higher level of losses, with the group's overall profit declining by 14% year-on-year, which is much better than the profit wipeout of the other two.

So how does Dolphin Research view Alibaba's future business trends and current investment value?

1) Alibaba Cloud: Dolphin Research has always held the view that the domestic AI story is just beginning, and although it cannot be quantitatively judged at present, from a qualitative perspective, at least the subsequent growth space has certainly not been fully released. Dolphin Research is optimistic about the medium to long-term growth trend of Alibaba Cloud. This quarter's actual performance of Alibaba Cloud also validated this expectation.

However, before the earnings release, the market's growth expectations for Alibaba Cloud were not low, and the actual extent of exceeding expectations was not very large. It is still necessary to pay attention to the actual acceleration of Alibaba Cloud in the future, and not to simply have optimistic expectations in advance. The valuation multiple of 5x P/S (corresponding to 25x PE at 20% NPM) commonly used in the current market is also not low. Therefore, for Alibaba Cloud, Dolphin Research's view is to regard it as a long-term opportunity, gradually releasing valuation as the market size of the domestic AI industry and Alibaba Cloud's "S" (i.e., revenue) continues to grow.

However, in the short to medium term, the announcement during the earnings period that Alibaba will develop its own chips and have them manufactured by companies other than TSMC undoubtedly alleviates concerns about chip bottlenecks, which is a positive sentiment (it is too early to say how much actual performance benefit the chips will bring). The significant increase in Capex expenditure this quarter and the management's statement in the conference call that Alibaba Cloud's growth rate will further increase, these signals will still drive sentiment and valuation to explore the optimistic boundary.

2) E-commerce + Instant Retail Business: Looking at the original Taotian Group alone, due to the benefits of technical service fees and full-site advertising tools not being fully realized, from the still good growth rate of GMR this quarter, the Taotian business should be able to maintain stable and good performance in the short to medium term. But with a longer view, combined with the performance of JD.com and Pinduoduo, the underlying color of the domestic e-commerce industry is still a situation of limited overall growth and quite fierce competition (the takeout battle that caused huge losses this round is essentially an extension of e-commerce competition), and this main narrative will not change significantly, so Dolphin Research's expectation for traditional long-distance e-commerce business is to maintain stability.

As for the current market focus—intense competition in instant retail, from the performance of JD.com and Meituan, the actual erosion of profits is far more serious than expected. Alibaba, which joined the battle the latest, still had relatively limited losses in the second quarter, and the loss situation in the fully launched third quarter is more important.

In the short to medium term, it is necessary to focus on whether instant retail can truly bring cross-selling to traditional e-commerce (reflected in the acceleration of Taotian's revenue growth), and whether Alibaba has the ability to shift the original investment budget to instant retail (reflected in the group's overall marketing expenses and losses being lower than expected, which is not obvious this quarter).

From a longer perspective, the management also clarified this time that in the short term, they will first rely on a large number of subsidies to expand the business scale; subsequently, gradually optimize the order structure and UE structure to reduce losses; finally, drive user cross-consumption through instant retail and integrate the original supply and channels of Taobao to create an ecosystem of "everything delivered to your home." Logically, this route is undoubtedly valid. Although it is not possible to predict in advance whether Alibaba can ultimately succeed, at least Alibaba's significant scale and capital advantage allow Alibaba to make such attempts, and even if it does not perfectly meet expectations in the end, it will not be a total loss (compared to Meituan, which cannot afford to lose).

This also aligns with Dolphin Research's previous analysis that e-commerce companies engaging in instant retail is not just a game, but has reasonable commercial motives, and is profitable from the perspective of the entire group. Therefore, Alibaba's investment will not be superficial, and even if the competition intensity declines after the third quarter, Meituan's original market position in instant retail is likely never to return.

3) In terms of valuation, Dolphin Research uses the SOTP valuation method, valuing the new China e-commerce group based on the original Taotian Group's fiscal year 2026 profit, deducting 40 billion pre-tax losses due to instant retail investment, at an 8x PE valuation, corresponding to a value of about $60 per share; Alibaba Cloud and the international e-commerce segment are basically unaffected, still corresponding to about $43 (5x PS) and $14 (1.8x PS) per share, respectively. The total price per share of the three core businesses is $117, which can be considered a conservative valuation. Adding the value of other businesses, Ant Financial, and Alibaba Health holdings, and net cash (this part is given a 30% holding discount), the total valuation is about $137.

However, after this earnings release, there is undoubtedly more optimistic sentiment and imagination injected into Alibaba Cloud and the entire China e-commerce segment, and in the short to medium term, it will further attack above the central valuation mentioned above.

The following is a detailed analysis of the performance:

I. New Financial Reporting Standards for Alibaba

In the new fiscal year 2026, with the integration of Ele.me's instant retail business and Fliggy's travel business into the original Taotian Group, forming a new China e-commerce group, Alibaba's organizational structure and financial reporting standards have been updated once again. As shown in the figure below, Alibaba Group's new organizational structure is divided into four major segments:

1) China E-commerce Group: Including the original Taotian Group + Fliggy + Taotian Flash Sale/Ele.me business;

2) The original international e-commerce group remains unchanged;

3) Alibaba Cloud Group also remains unchanged;

4) All others, including the previously independently disclosed Cainiao, China Local Services, Alibaba Entertainment Group, etc., are all classified into other business segments.

II. How did the debut of the new China e-commerce segment perform? Not bad growth

1. In the new China e-commerce group, which includes Ele.me's instant retail business and Fliggy's travel business, the core metric reflecting the original Taotian business, CMR grew by 10.1% year-on-year this quarter to 89.3 billion (last year's historical data was adjusted up by about 1 billion, possibly due to the inclusion of Fliggy), although the growth rate slightly slowed compared to the previous quarter, it maintained 10%, which can undoubtedly be considered a good performance slightly exceeding the consensus expectations of sell-side analysts (for closely tracking buy-side analysts, it may just meet expectations).

Dolphin Research believes the reasons behind this are the overall growth of the e-commerce industry driven by state subsidies improved in Q2 compared to Q1, and the further release of the benefits of the 0.6% service fee increase and the full-site advertising tool on Taotian.

2. After the integration of Taobao Flash Sale/Ele.me, the instant retail revenue this quarter was nearly 14.9 billion, a year-on-year increase of 12%, according to some research, after the launch of Taobao Flash Sale, Alibaba's daily order volume for instant retail in May and June exceeded 40 million, doubling from the previous slightly over 20 million. However, the revenue is very limited, probably because subsidies to merchants or delivery personnel offset most of the new revenue.

3. In two business lines with little change in scope after the structural adjustment, the self-operated retail (including related fulfillment) business, this quarter's revenue grew by 7% year-on-year, significantly improving from the previous quarter. According to the company, the main reason for the accelerated growth is the benefit of incorporating self-operated related fulfillment revenue, but the company's measures to reduce some low-quality self-operated businesses are still ongoing.

As for the veteran 1688.com wholesale business, as one of the current main footholds of Taotian's "cost-effectiveness" strategy, this quarter's revenue grew by 13% year-on-year, slowing down slightly quarter-on-quarter, but still good, slightly exceeding Bloomberg's expectations. The additional service fees added to 1688 members are the main reason for driving revenue growth.

Overall, due to the good growth of CMR and other business lines this quarter, the new China e-commerce group's total revenue grew by 9.7% year-on-year this quarter, better than some Wall Street firms' expectations seen by Dolphin Research.

III. How much loss was caused by the takeout investment? About 15 billion, also higher than expected

One of the current market's most concerned questions is how much loss was caused by the integration of Ele.me and the significant investment in Taobao Flash Sale? The company disclosed that the new China e-commerce group's adj. EBITA this quarter was 38.4 billion, a decrease of about 10.4 billion year-on-year. Although there is no Bloomberg consensus expectation for this number, Dolphin Research saw a prediction from a certain Wall Street firm of 39.5 billion, indicating that the actual loss caused by takeout is higher than expected, but the gap is not very large.

Estimating the actual loss amount caused by instant retail investment, assuming that without the impact of the takeout battle, profits would have grown by 9% year-on-year (slightly lower than the CMR growth rate), then the net loss caused by takeout investment is about 15 billion (in adj. EBITA terms). This is roughly equivalent to the amount deduced from marketing expenses later. This loss amount is indeed significantly higher than the approximately 10 billion expected by sell-side analysts before the earnings release. Under the premise that Taobao Flash Sale is the latest entrant, this loss level is almost consistent with JD.com, "the actual losses of the 'Takeout Trio' are more severe than expected."

IV. Alibaba Cloud significantly accelerates, and profit margins also improve

Although Alibaba's performance in the takeout story is not good, its performance on another main line—AI, was quite impressive this quarter. Alibaba Cloud's revenue growth rate significantly increased to nearly 26% year-on-year, accelerating by over 8 percentage points quarter-on-quarter. Although before the earnings release, sell-side analysts had generally raised their growth expectations for Alibaba Cloud to around 20%~25%, the actual performance exceeded the upper limit of expectations.

As the first full quarter to benefit from DeepSeek domestically, according to the company, the speed of enterprise adoption of AI-related products has significantly increased, also driving the growth of related traditional demand.

Besides the accelerated growth, equally impressive is that Alibaba Cloud's profit margin also improved by 0.8 percentage points quarter-on-quarter. As the revenue scale accelerates, the improvement in scale effects has begun to gradually offset the impact of a large amount of new Capex on profit margins.

Additionally, this quarter's cash Capex expenditure reached 38.6 billion, significantly increasing from the previous quarter's 24 billion, consistent with market rumors before the earnings release. Such aggressive Capex investment likely means that the original guidance of an average annual Capex of 120 billion over three years will be broken upwards, reflecting Alibaba's management's quite optimistic expectations for the subsequent growth of the AI industry and Alibaba Cloud.

V. Turning to refined operations, international e-commerce is on the verge of breaking even

Partly due to the current unfriendly overseas policy environment, Alibaba's international e-commerce had previously shifted more towards refined operations. This quarter, although the revenue growth rate of international e-commerce continued to slow to 18.6% year-on-year, significantly falling from the 30%~40% level of previous quarters.

The bright spot is that this quarter's progress in reducing losses in international e-commerce far exceeded expectations, with this quarter's loss only 0.6 billion, and the management's promise of turning international e-commerce profitable in the new fiscal year has basically been announced in advance. Although growth has slowed, it is nearly breaking even, and the combination of the two indeed reflects the results of refined operations. Dolphin Research speculates that there may also be a shift of overseas investment budgets back to the domestic e-commerce and Alibaba Cloud, which are entering an "intense" investment period.

VI. Other business revenue shrinks significantly

This quarter, new additions include Cainiao, Alibaba Entertainment, and AutoNavi, but the other business segment, which was stripped of Intime and Sun Art, achieved revenue of about 58.6 billion, a significant year-on-year decrease of 28%, mainly due to the divestiture of Intime and Sun Art Retail, and the impact of some logistics functions of Cainiao being taken over by the corresponding self-operated retail and international e-commerce at the front end. However, since Alibaba Group has clarified the new three major investment directions after this organizational structure change, the reduction in resources for the remaining "other" should not be surprising.

However, this quarter's other business losses increased significantly by 31% quarter-on-quarter to 1.42 billion, and Dolphin Research cautiously suspects that there may be an impact of classifying the loss-making business lines from other segments into the less focused "other segments" during the business and structural adjustment.

VII. Overall performance

Overall, mainly due to the poor performance of other business segments and the impact of divesting Sun Art and Intime, Alibaba's total revenue this quarter was about 247.7 billion, a year-on-year increase of 1.8%, slightly below sell-side expectations, but the gap is not large. Excluding the impact of divestitures, the actual comparable revenue growth was 10%, which is not bad.

From the perspective of costs and expenses, this quarter's gross profit, excluding stock-based compensation expenses, increased by 14% year-on-year, significantly outperforming revenue growth. The profit margin increased by 4.9 percentage points year-on-year, consistent with the increase in the previous quarter, mainly due to the benefits of divesting Intime and Sun Art (large revenue scale, but very limited profit margin). Additionally, it is worth noting that the growth of the instant retail business does not seem to have significantly dragged down the gross margin, possibly because Alibaba's subsidies for takeout are mainly reflected in marketing expenses, with little recorded in costs.

In terms of expenses (all on a basis excluding stock-based compensation expenses), the most noteworthy is that marketing expenses this quarter reached 52.7 billion, a significant increase of 20.8 billion compared to the same period last year, reflecting the substantial incremental marketing expenses caused by the takeout battle. Combining the financial reports of JD.com and Alibaba in the second quarter, Dolphin Research believes that so far, the two e-commerce companies do not seem to have shown a significant ability to shift the original investment in e-commerce to takeout investment. The continued investment in e-commerce business cannot be significantly reduced.

In terms of other expenses, R&D expenses increased by 17% year-on-year, with a slightly higher growth rate, but not exaggerated under the AI wave. Management expenses significantly decreased by nearly 48% year-on-year due to a high base from a shareholder litigation expense confirmed in the same period last year. However, even without considering the base issue, the absolute value of management expenses this quarter is only 620 million, which is significantly lower, seemingly indicating that some funds were shifted from management expenses.

In total, the group's overall adjusted EBITA was 38.8 billion, a year-on-year decrease of about 14%, mainly due to the increase in takeout investment, but partially offset by the profit increase and loss reduction in the Alibaba Cloud and international e-commerce segments. Compared to JD.com and Meituan's profit wipeout, the 14% year-on-year decrease in profit is significantly stronger.