Alibaba Earnings: Halt of Cloud Spinoff a Surprise, Size and Timing of Capital Returns Uncertain

Key Morningstar Metrics for Alibaba Group Holding

• Fair Value Estimate: $128.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Alibaba Group Holding’s Earnings

We are surprised that Alibaba BABA will no longer fully spin off its Cloud Intelligence Group, and we see larger uncertainty around the size and timeline of capital returns to shareholders. We leave Alibaba’s forecasts and the fair value estimate for its stock unchanged. Although the firm is still undervalued, we now prefer JD.com JD, as we think it’s more likely to turn around next year.

Alibaba has de-emphasized gross merchandise volume, or GMV, which leads us to think it’s not confident about that metric growing in the future. Meanwhile, JD.com guided for 2024 GMV growth to be higher than the retail sales of consumer goods growth next year. In the September quarter, there was a modest decline in Taobao and Tmall online paid GMV but high-single-digit GMV growth at JD.com.

Management said the United States’ recent export ban to China—which we believe is about Nvidia’s NVDA pared-down H800 and A800 chips—led to the halt of the cloud unit’s spinoff. However, we think Alibaba would have already factored such bans into its decision about the spinoff. Long before the plan was announced in May 2023, there was the October 2022 ban on exporting Nvidia’s A100 and H100 chips to China. Hence, we think the spinoff may have been scrapped because a change of CEO for the cloud unit leads to a review of future strategy. A possible concern could be that the cloud unit requires consistent and sizable investment to stay ahead of the game, and a spinoff unit may see more difficulty in financing as a more independent company. We think there will be more clarity as to the cloud corporate strategy direction when the unit’s CEO is finalized.