Alibaba FY2024: Stop trying to compare BABA to AMZN

Disclosure: The author owns securities in the referenced company or companies. This is not financial advice or a recommendation, and not a substitute for due diligence. 

Originally tweeted on May 14, 2024

Alibaba Group (NYSE:BABA) is trading down ~5%, but nowhere near previous lows. The market will need to process their results and it will come down to how they interpret the call and the implications of growth, which really is a global macro call.

Here are my thoughts:

Image 1: 

Revenue + 7%, Net Income -96%, Non-Diluted earnings/ADR -5%.

Looks to me like they are taking the opposite strategy of AMZN in the sense that instead of trying to push more cost onto sellers to juice the numbers, they did the opposite to improve revenue and gave up margin to ensure sellers still got enough volume to stay with the selling on the platform.

This is to be expected in a communist country as all corporations are a part of fiscal stimulus. This is not well understood by many US-based finance folks. However, it is something China can and does actively do that other nations cannot given how China structured its banking, payments, and sales recording systems. For a little insight into it, imagine what’s possible when nearly everyone in a nation pays via apps and none of that data is private to the government! For many learning about China macro and Chinese companies, this is something to keep in mind that is often NOT discussed.

The buyback though is insane (156M ADS, or US$12.5B) as is the dividend (US$2.5 billion).

Image 2 (Above):

Note the revenue breakout for the Int'l segment. From a macro perspective, this is wonderful as it shows some glimmers of hope that the trade war is subsiding. This is key for a nation that used to export 1.5x what it imported. The red boxes represent international trade, both direct-to-consumer and via wholesale. 

The green box represents Cainiao & Local Services which I talk about all the time and haters keep trying to suggest I'm wrong on this. I am not. 

A few things:

1) They aren't spinning Cainao out. I know it’s pettym but let me just say it: I told you so. 

2) I still suggest that on a volume basis Cainiao will be larger than FDX which owns its planes and trucks. I have haters when I say this. My comment to the haters is that they DO NOT appreciate how outsourcing works in Asia and how that fundamentally differs from North America and Europe.

Anywho, you'd need to put Cainiao + Local services together to understand what's up here compared to something like a FedEx (FDX). Local is a mix of stuff including last mile.

Image 3 (Above) 

Something you will never see except in China. Execs are actually taking less compensation in shares despite the fact that capital is clearly being deployed back to shareholders via share buybacks and dividends. 

Call Q&A Notes: 

1) Lots of discussion on ROI. But the fact is, they gave up their own ROI to improve the ROI of their sellers. No matter how you slice it, that's how it shows. They are saying this is a 12m event. 

2) They believe they will be returning to double-digit growth (and this will drive earnings). Weird question on the use of AI to grow revenue. Their point was, that investment is more or less done so you have lower costs going forward, but you also have AI actively used and stimulating demand for other offerings. Let me help translate their answer. This was a very polite way saying the analyst is conceptualizing AI and its impact incorrectly and probably is indicative of a common misconception throughout Wall Street. 

3) As relates to AI & Cloud, this is similar to what you're hearing from AMZN, except it sounds like their next AI product cycle is ahead of what we're up to in the US, to be honest. In other words, the tools built for using AI in their business is up and running and starting to show results. Recall, China has government-monitored/secured and centralized data. North America and Europe (in theory) have decentralized data that requires individual corp security. Hence, their AI- consumer app development has certain advantages that allows a different path of growth.

4) Some questions appear to indicate that folk are trying to jam the BABA story into an AMZN paradigm of charging sellers more. Management reminds them that it's not the same operating model and it really just comes down to ROI for all platform users. 

5) An analyst asked about GMV (gross merchandise volume) and CMR (customer-managed relations) being higher than the general domestic growth in China. They asked how this trend might continue. He again said, to focus on ROI as these can sometimes be less important given that you can have GMV and CMR with low-margin stuff, which while nice, is not the end game. The end game is for platform participants to experience higher ROI.

6) Follow-up to the above, management clarified that if the question was oriented toward growth in general. When thinking about what makes the consumer spend, the following is often ignored: Chinese consumers have 19T in savings and the highest savings rate of all time (~1/3 of their income). It's more about consumer confidence. The macro and willingness to spend is still impacted by concerns in the property sector. They are saying this is subsiding. 

7) A lot of concern on profitability. They are more focused on revenue and user experience right now and believe profitability will necessarily come after that. They talk about the trends in the Middle East and other places they are investing in and how it's going. This is an hour into the call and it's fascinating to realize that AMZN is primarily US and to a lesser extent other countries which are still unprofitable to the biz. The exact opposite is the case for BABA because of where supply (the providers of product) and demand (the consumers) are.

8) As a function of #7, the types of services they facilitate involve international logistics. BABA does attempt to compete with local where it makes sense even in things like warehousing (and of course with Cainiao, you have 1 very important piece of distribution).

9) There was a weird question related to how they will continue to buy back shares as the price goes up. He reminded them they still have $30B USD left in the share buyback program through 2027.  Ultimately it comes down to cash flow and best use of capital. It is a nutty number to buy back, in my opinion. 

10) Another question asking for clarification on AI. Is it for answering customer inquiries globally or what, precisely? Their goal is AGI voice, audio, image, video as with everyone else on the earth. I’d mention that this question that was focused on their Natural Language Processing (NLP) models almost sounds like some guy from AMZN needs inspiration and is asking for personal reasons.

Link to original post: https://x.com/marketswithmay/status/1790372044116308057