Alibaba Earnings: Firm Sees Faster Breakeven of Most Segments and Cloud Growth

Key Morningstar Metrics for Alibaba Group Holding

• Fair Value Estimate: $163.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Alibaba Group Holding’s Earnings

Alibaba Group Holding BABA expects most of its loss-making businesses to be profitable in the next one to two years. The firm has forecast that capital expenditures in the next three years will be larger than in the past decade. Taobao Tmall Group’s adjusted EBITA turned positive at 2% year on year in the quarter.

Why it matters: We now have stronger confidence that Alibaba can turn around its loss-making businesses. Amap achieved profitability in the December quarter, and Alibaba International Digital Commerce Group targets profitability next fiscal year.

• We think aggressive cloud capex will protect its leadership in cloud and Al in China, fulfill excess demand, and accelerate cloud revenue growth. Cloud margin will eventually rise because of an increasing mix of higher-margin AI revenue and utilization.
• TTG’s customer management revenue growth will be supported by the increasing adoption of the digital marketing tool Quanzhantui and the introduction of Taobao software fees in September 2024. However, we think it’s still uncertain whether it can maintain gross merchandise volume share and margin.

The bottom line: We have raised Alibaba’s fair value estimate by 27% to $163 per share after raising our earnings forecasts, partially offset by higher capex. The company is our top pick in the China e-commerce sector.

• We increased Alibaba’s 10-year adjusted EBITA CAGR forecast to 9% from 5% due to faster-than-expected turnaround of loss-making businesses, an increasing contribution from higher-margin AI revenue, and higher efficiency associated with the deployment of AI in Alibaba’s businesses.
• Alibaba’s 10-year total revenue CAGR estimate remains largely intact at 8%. We assume 10-year revenue CAGRs to be 3% in TTG, 9% in AIDC, 6% in Local Services Group, 5% in Cainiao (versus 9% previously), 22% in Cloud Intelligence (versus 17%), and 3% in Digital Media and Entertainment Group.