Suddenly, Everybody Loves Alibaba, But Struggles Persist

AI Promises and Cloud Growth Mask Deeper Issues in Alibaba’s Other Business Segments

A small handshake for Jack, a huge symbol for the tech companies

What a difference a handshape makes. Jack Ma, once the face of Alibaba, was recently invited to a high-profile meeting with China’s tech leaders. A rather curious turn, given that he’s technically unemployed—at least by official titles. No CEO badge, no boardroom chair, yet there he was, standing shoulder to shoulder with the titans, despite the fact that he no longer officially works at Alibaba. But for those of us who’ve spent any time navigating the quirky waters of Chinese investing, we know that symbols here are worth their weight in gold. And this one? Well, it’s practically priceless.

Of course, politics plays a role in every market, but in China, it’s more like the lead actor stealing the show. As I’ve pointed out before, the pendulum swings in China’s regulatory environment can be erratic—to put it mildly. Take the baijiu sector as an example. Back in 2014-15, it endured the same kind of tough crackdown that China’s tech sector faced in 2021. Yet, just as you’d expect, after the shake-up, the pendulum swung right back. Take Guizhou, one of China’s poorer provinces. It’s home to Kweichow Moutai, and without its dividends, Guizhou would likely be in deep trouble. So, naturally, after the storm passed, the baijiu companies bounced back. That’s just how it works here—after a jolt, the market tends to find its equilibrium.

Fast forward, and the pendulum is swinging back for tech companies, too, most notably with the recent meeting with Xi. But the real surprise? Jack Ma’s appearance. It’s remarkable not just because of the meeting itself, but because of his infamous Bund Finance Summit speech that triggered the government’s crackdown on the tech sector in the first place.

While it would be naïve to believe the government and tech companies are now best buddies, one thing’s certain: China needs its tech companies. With the real estate sector still, well, not quite itself, the tech sector is one of the few pillars holding up the economy. If China wants to grow, it will have to rely on e-commerce and tech—the latter now accounting for 30% of Chinese GDP. And then there’s AI, which is quickly becoming a national security concern. In short, China has to support its tech giants, whether it wants to or not.

By the way, who wasn’t invited to the tech company party? The subpar (this was the nicest word I could find!) child, Baidu. China does not follow the American education principle of “nobody gets left behind.” In China, if you can’t keep up, you’re left behind. And that’s exactly what happened to Baidu. I’ve written about this before, and if you want a brief recap of their latest earnings, you can check it out here.

Ok but let’s discuss the earnings.

General comments:

I find it quite remarkable how the narrative around Alibaba has changed. For the past few quarters, whenever Alibaba reported somewhat decent earnings, the stock would tank by 10% or more. This time, in my opinion, they presented a mixed bag of earnings. There were some positive highlights, like the growth in the AI business, but these weren’t exactly surprising if you’ve been following Alibaba closely. On the flip side, there were some less-than-encouraging developments in other business units, and the share buyback was notably smaller compared to previous quarters. Yet, despite all this, the stock went up by more than 10%.

Let me walk you through the different business units, focusing primarily on the core ones and briefly touching on the non-core units without going into too much detail.

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I’ve already arranged dinners over the weekend with one person from Alibaba and one from Pinduoduo. I’m also planning to visit Hangzhou soon to meet with the Investor Relations team. For the paying users, I’ll keep you updated in the chat if anything interesting comes up. Also, let me know if you have any questions you’d like me to ask them.

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Capital allocation

Before discussing the different business units, let’s touch on capital allocation. Finally, some movement is happening as they’re divesting non-core assets, particularly in their offline businesses, like SunArt and Intime. They’ve received PRC antitrust approval, and they expect the financial impacts to be reflected in the March quarter. So, we can anticipate some write-downs and impairment losses coming through.

Alibaba still has over $20 billion available for share buybacks, but despite raising $5 billion in June, believing the $80 share price was undervalued, buybacks slowed significantly last quarter. This is particularly odd given that the stock price remained around $80 during that time. That’s a bit disappointing.

Let’s get the small units out of our way:

Digital Media and Entertainment Group

Non-core - I have nothing to add here

Cainiao

While Cainiao is an essential part of Alibaba’s logistics infrastructure, the reported revenue and earnings are not entirely meaningful. This is because Alibaba has the flexibility to allocate both costs and earnings across different business units, essentially shifting them around as needed. As a result, the actual financial performance of Cainiao can be somewhat misleading. What really matters, however, is that they’ve now opened up their services to other players, which means their cross-border delivery capabilities could become a revenue stream in the future.

Local Services group

The Local Services Group, primarily made up of AMAP and Eleme, was another somewhat disappointing segment. While AMAP turned profitable for the first time, losses at Eleme actually widened quarter-over-quarter. Revenue growth was also modest at just 12%. Meanwhile, their main competitor, Meituan, has not only captured a significant share of consumer mind but has been highly profitable in food delivery for quite some time. Eleme, on the other hand, is struggling to keep up.

With news now breaking that JD is entering the food delivery market, additional losses could be on the horizon. I’ve been looking into JD’s entry into this space and may write a more detailed article on it in the future. For now, I believe there could be some short-term pain, but this doesn’t seem like a long-term issue as I doubt that JD will make much progress here.

Even the loss-making Elema is an important part of Alibaba because it essentially serves as their instant delivery infrastructure, which is valuable in its own right.

All others

It still baffles me every quarter that no one talks about Alibaba’s other business segment, especially since it’s almost twice the size of their cloud business, with losses that even exceed the earnings from the cloud unit. While the cloud business gets all the attention, this other segment, which dwarfs the cloud, is essentially erasing its earnings.

That said, as I mentioned, progress is being made, and it’s clear that Joe Tsai is taking steps by divesting businesses such as SunArt and Intime. On a related note, during the earnings call, they were asked about potentially divesting FreshHippo. Their response was somewhat evasive—they said they like the business and it’s growing fast, but also mentioned they would welcome other investors or partners. This suggests that if the right price comes along, they might be open to selling.

Taobao and Tmall Group

Alibaba’s latest earnings show a 9% growth in customer management revenue for Taobao and Tmall, fueled by online GMV growth. Part of this boost can be attributed to a 0.6% service fee introduced last quarter and the growing adoption of Quanzhantui, their AI-powered marketing tool. But let’s not get too carried away—heavy investments in user acquisition are also at play. The e-commerce competition in China is as fierce as ever, with no signs of slowing down.

They’re also improving customer service and creating a friendlier environment for merchants, which includes a set of new measures introduced in January. All of this helped them keep their market share steady. Notably, they didn’t see a drop in average order volume, which had been a concern last quarter. The result? A modest 2% increase in adjusted EBITDA and a 5% growth in revenue. Not too long ago, these numbers would’ve tanked the stock, but today, they’re being seen as a positive sign.

The collaboration with WeChat Pay stood out too—despite already having a massive user base, this partnership led to a substantial increase in users.

One of the positives from Alibaba’s recent earnings is their increasing use of AI to enhance Taobao and Tmall. They’re working to transform Taobao into more of a lifestyle and consumption hub. It’s a smart move, but let’s not forget, they’ve had some catching up to do. Before, Pinduoduo was running circles around them, and JD was quicker to adjust its strategy. Under Daniel Zhang’s leadership, Alibaba was sluggish at best.

Now, with new management at the helm, we’re starting to see some positive changes, but it’s clear this is still a work in progress. It’ll take time before these shifts fully materialize, but the signs are there.

While last quarter was all about consumer downgrades, Chinese consumption, and government subsidies, this quarter, the focus shifted entirely to AI, powered by DeepSeek. What struck me as particularly interesting is that neither management nor analysts mentioned the Chinese consumer at all. They didn’t even bring up the Double 11 numbers, which, you’d expect, should’ve been in this quarter’s report.

In the rest of this article, I discuss the Cloud Intelligence Group, which performed positively, as well as the International Digital Commerce Group, which was one of the negative highlights of this quarter.