Alibaba Earnings: Strong Results, Near-Term Choppy Recovery in Chinese Businesses

Alibaba Group Stock at a Glance

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

Alibaba Group Earnings Update

Alibaba Group BABA reported strong June-quarter results, with revenue beating the Refinitiv consensus by 4% and adjusted EBITA by 21% during the company’s first quarter under its new organizational structure. Year-on-year growth for revenue and adjusted EBITA were 14% and 32%, respectively, versus 2% and 60% in the March quarter. We see a noticeable top-line recovery in the firm’s China commerce retail, local services, cloud and digital media, and entertainment businesses as a result of a low base from the COVID-19 lockdown during the same period last year. Nevertheless, we think that in the near term, the China commerce business will see a choppy recovery due to recent weak macroeconomic data, such as year-on-year deflation, an import decline in July, and an absence of major consumption stimulus like cash or voucher handouts so far.

We are impressed with the margin improvement efforts in the quarter, which are especially pronounced in two large loss contributors: international digital commerce and local services businesses. There wasn’t any significant update on the spinout and spinoff of Alibaba’s businesses, or on the scale and timing of shareholder capital return after such events.

We maintain our forecasts and our fair value estimates of $128 per share for Alibaba stock. The company is attractive for long-term investors, in our view. As we see it, at the current share price, investors are only paying for the value of Taobao and Tmall Group, Alibaba’s strategic investments, and its cash and cash equivalents, while getting the value of all its other five business groups for free.