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Alibaba (BABA) Q2 Earnings Beat Estimates, Revenues Rise Y/Y

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Alibaba Group Holding Limited (BABA - Free Report) reported second-quarter fiscal 2023 non-GAAP earnings of $1.82 per ADS (RMB 12.92), which surpassed the Zacks Consensus Estimate by 9%. The figure increased 15% from the year-ago fiscal quarter’s reported figure in RMB terms.

Revenues of RMB 207.2 billion ($29.1 billion) rose 3% from the year-ago fiscal quarter’s level. Further, the top line missed the Zacks Consensus Estimate by 6.3%.

The top-line increase was driven by growing momentum across Alibaba’s China commerce and international commerce wholesale businesses.

Strength across the local consumer services, Cainiao logistics services, cloud computing business, and digital media and entertainment contributed well.

However, the overall China Commerce segment performed sluggishly in the reported quarter. Weak consumption demand due to the resurgence of COVID in China remained a major headwind. The slowdown of cross-border commerce as a result of increasing logistics costs and foreign currency volatility affected the quarterly results.

We note that the disruptions triggered by the coronavirus pandemic are likely to remain a concern for Alibaba’s domestic businesses.

Revenues by Segments

China Commerce (65% of total revenues): The segment comprises marketplaces operating in China’s retail and wholesale commerce markets. Alibaba generated RMB 135.4 billion ($19 billion) of revenues from the segment, which fell 1% from the year-ago fiscal quarter’s reported figure.

China commerce retail (63% of total revenues): The business vertical’s revenues for the reported quarter were RMB 131.2 billion ($18.4 billion), reflecting a 1% dip from the year-ago fiscal quarter’s reported number. The downfall was attributed to the decline in customer management revenues due to sluggish growth in online physical goods GMV at Taobao and Tmall marketplaces. Nevertheless, positive contributions from Alibaba Health’s direct sales businesses and Freshippo were tailwinds.

China commerce wholesale (2% of total revenues):The business generated revenues of RMB 4.2 billion ($592 million), up 1% from the year-ago fiscal quarter’s reported level.

International Commerce(8% of total revenues): The segment comprises marketplaces operating in the international retail and wholesale commerce markets. Alibaba generated RMB 15.7 billion ($2.2 billion) revenues from the segment, which grew 4% from the year-ago fiscal quarter’s reported figure.

International commerce retail (5% of total revenues):Revenues for the reported quarter were RMB 10.7 billion ($1.5 billion), up 3% from the year-ago fiscal quarter’s reported figure due to strong growth of Trendyol e-commerce business. However, declining AliExpress orders in Europe remained a headwind.

International commerce wholesale (3% of total revenues):The business generated revenues of RMB 5 billion ($704 million), up 6% from the prior-year fiscal quarter’s reported figure. Growth was attributed to a surge in revenues generated by cross-border-related value-added services.

Local consumer services (6% of total revenues): Revenues grossed RMB 13.1 billion ($1.8 billion), up 21% from the year-ago fiscal quarter’s reported figure. The rise was driven by strong order growth of the Amap business.

Cainiao logistics services (7% of total revenues): Revenues summed RMB 13.4 billion ($1.9 billion), up 36% from the year-ago fiscal quarter’s reported figure. The upside was led by strong momentum across domestic consumer logistics services.

Cloud Computing (10% of total revenues): The segment generated revenues of RMB 20.8 billion ($2.9 billion), up 4% from the year-ago fiscal quarter’s reading, aided by solid momentum across financial services, public services and telecommunication industries.

Digital Media and Entertainment (4% of total revenues): Revenues logged RMB 8.4 billion ($1.2 billion), increasing 4% from the year-ago fiscal quarter’s reported figure. The increment resulted from revenue growth of Alibaba Pictures and Youku businesses.

Innovation Initiatives and Others (0.6% of total revenues): Revenues from the segment were RMB 409 million ($57 million), down 45% from the year-ago fiscal quarter’s reported figure.

Operating Details

In the fiscal second quarter, sales and marketing expenses were RMB 22.4 billion ($3.1 billion), down 1% from the year-ago fiscal quarter’s reported figure. As a percentage of total revenues, the figure contracted 300 basis points (bps) from the year-ago fiscal quarter’s reported figure to 11%.

General and administrative expenses were RMB 10.6 billion ($1.5 billion), up 19.3% from the year-ago fiscal quarter’s level. As a percentage of total revenues, the figure matched the prior-year fiscal quarter’s reading of 5%.

Product development expenses were RMB 15.2 billion ($2.1 billion), down 1% from the year-ago fiscal quarter’s reported figure. As a percentage of total revenues, the metric contracted 100 bps from the year-ago fiscal quarter’s 7%.

The operating income was RMB 25.1 billion ($3.5 billion) in the reported quarter, increasing 68% from the prior-year fiscal quarter’s level. The operating margin was 12% in the fiscal second quarter.

Adjusted EBITDA increased 24% from the year-ago fiscal quarter’s reported figure to RMB 43.3 billion ($6.1 billion).

Balance Sheet & Cash Flow

As of Sep 30, 2022, cash and cash equivalents were $29.1 billion (RMB 206.7 billion), up from $26.4 billion (RMB 176.7 billion) as of Jun 30, 2022.

Short-term investments totaled $37.98 billion (RMB 270.2 billion) at the end of second-quarter fiscal 2023, down from $41.3 billion (RMB 276.5 billion) at the end of first-quarter fiscal 2022.

Alibaba generated $6.6 billion (RMB 47.1 billion) cash from operations in the reported quarter compared with $5.1 billion (RMB 33.9 billion) in the previous fiscal quarter.

BABA’s free cash flow was $5 billion or RMB 35.7 billion.

Zacks Rank & Stocks to Consider

Currently, Alibaba carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the retail-wholesale sector are Dollar General (DG - Free Report) , Walmart (WMT - Free Report) and Arhaus (ARHS - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dollar Generalhas gained 8.5% on a year-to-date basis. The long-term earnings growth rate for the DG stock is currently projected at 11.1%.

Walmart has returned 2.3% on a year-to-date basis. The long-term earnings growth rate for the WMT stock is currently projected at 5.5%.

Arhaus has lost 37.1% on a year-to-date basis. The long-term earnings growth rate for the ARHS stock is currently projected at 14.3%.

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