Alibaba Makes Another Step Towards Unlocking Value

On May 18th, following Walmart (NYSE: WMT) who topped estimates due to resilient customers, Alibaba Group Holding Limited (NYSE: BABA) showed it has made significant progress on the profitability front, despite quarterly revenue missing expectations. This is the first report since its historical restructuring that split the company into six business units and also the first since COVID-19 restrictions were eased at the end of last year.

Fourth Quarter Highlights

Revenue for the quarter ended on March 31st amounted to $29.6 billion, missing estimates but rising 2% YoY. Although non-GAAP diluted earnings per share missed expectations as they amounted to 1.34 yuan, they were up 35% YoY. The adjusted net profit rose 38% YoY as it rose up to $4.0 billion.

A Slow Start Of The Year

Like Amazon, Walmart and Home Depot, Alibaba observed a slow start of the year with total sales of physical goods. But China, where Alibaba operates generates almost half of the world’s global online transactions, saw its retail sales in April rise 18.4% and Alibaba said it already observed a positive momentum in March after the initial slowdown. However, results didn’t show the improvement for March as analysts had hoped.

The Cloud Spinoff

The Chinese “Amazon” revealed that the cloud unit will be spined off into a newly listed company. Being a major player in China, Alibaba wants to face off U.S. titans, namely Amazon and Microsoft Inc (NASDAQ: MSFT). Wedbush Securities analyst Dan found this to be a no-brainer move and step in the right direction.

While Microsoft topped cloud expectations with its latest reported quarter, this unit was a weak spot during the reported quarter as sales dropped 3% YoY, mostly due to January’s delivery delays due to COVID-19 restrictions as well as a loss of top overseas customer. Even Amazon warned of a cloud growth slowdown in its latest reported quarter.

What is also interesting is that Alibaba’s quarterly report also came with a mission statement of the Chinese titan working to make cloud computing more affordable and accessible.

AI Is Expected To Become A Major Driver

Alibaba’s cloud comes hand in hand with AI. Like Microsoft, Alibaba developed its own ChatGPT-style generative AI tool earlier this year which is expected to help accelerate customer adoption of its cloud computing service. CEO Daniel Zhang is expecting this technology to bring an exponential increase in computing power.

Splitting Into Units Is A Story That Has Yet To Play Out

Alibaba’s story continues to be written as the company has taken steps towards unlocking the value of its business. While its tech peers in the U.S. are cautiously turning around, Alibaba’s results have significantly improved, with the latest results being significantly stronger from last year’s comparable quarter. Considering that the latest quarter had the strongest growth rate in the fiscal year that was just closed, momentum is on Alibaba’s side. Meanwhile, both Microsoft and Amazon gave cautious and lackluster guidance. If other things remain equal and this trend continues, Alibaba could bring in significantly higher profits in the undergoing fiscal year.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.

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