ii view: Alibaba cloud profit battles foggy regulatory outlook

Expanding sales have been matched by growing regulatory uncertainties. We assess prospects. 

Third-quarter results to 31 December

• Revenue rose by 37% to $33.8 billion
• Adjusted earnings (EBITDA) up 22% to $10.5 billion

Chief executive Daniel Zhang said:

“China was the only major economy to achieve positive GDP growth last year. Thanks to the rapid recovery of China’s economy, Alibaba had another very healthy quarter.  We achieved another successful 11.11 Global Shopping Festival by stimulating consumption, satisfying consumer demands and supporting the business recovery of merchants in response to the impact of the pandemic. Our cloud computing business continues to expand market leadership and show strong growth, reflecting the massive potential of China’s nascent cloud computing market as well as our years of investment in technology.

"Looking ahead, we are confident that we will continue to create value for our customers, lead with innovation and make our contributions to society.”

ii round-up:

Chinese online retailer Alibaba (NYSE:BABA) reported a move into adjusted profit for its cloud computing business as the company overall faces significantly heightened Chinese regulatory scrutiny.

Cloud computing sales jumped by 50% to $2.47 billion, aided by robust demand from customers in the internet and retail industries and public sector. But the news came against the backdrop of a previously announced investigation by China’s State Administration for Market Regulation. It also follows on from the suspension of Ant Group's stock market listing in November due to regulatory changes. Ant Group runs Alipay, an online payment system in China. It is roughly one-third owned by Alibaba and shares executive involvement by Chinese businessman Jack Ma.   

Alibaba shares gained marginally in early pre-market US trading following these results. They've dropped by 13% since late October and gaining by more than a quarter over the last year. Shares for US online retailing mammoth Amazon (NASDAQ:AMZN) are up 10% since late October and by more than 60% over the last year. Shares for US online selling site eBay (NASDAQ:EBAY) are up over 70% during the last year. 

Overall, Alibaba sales and earnings for the quarter surpassed Wall Street expectations, led by a near 40% jump in its core retail revenues. Retail sales made via brands such as Tmall and Taobao account for nearly 90% of total group sales. Cloud computing accounts for a further 7%. With the balance made up from its digital media and innovation businesses.

Alibaba has established a special taskforce to deal with the now ongoing anti-monopoly investigation by the Chinese authorities. It hopes to update investors once the investigation is complete. 

Similarly, Ant Group’s business prospects and stock market debut plans remain subject to substantial uncertainties. Alibaba management hopes to update investors once Ant Group has completed the relevant regulatory procedures for its rectification plan. 

ii view:

Alibaba has made huge progress in its two-decade long history. These latest results and the move into adjusted profitability for its cloud computing business mark another milestone. Prospects for cloud computing at US tech giants Amazon, Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) remain closely watched, with Alibaba offering a Chinese but US listed play. 

But for investors, recent months have only served to raise questions over the conflict between capitalism and Chinese communist rule. Rumours of the disappearance of former chief executive Jack Ma have only added to nerves. Now, both an anti-monopoly investigation and rulings regarding Ant Financial overhang. 

More favourably, Alibaba recently raised its share buyback programme from $6 billion to $10 billion over the period through the end of 2022, potentially offering some share price support. Exposure to expected Chinese growth over coming years is also significant. But for now, and with major decisions on growth potential currently in the hands of the Chinese authorities, investors may wish to wait for regulatory clarity before taking action.  

Positives

• Exposure to expected Chinese economic growth
• Looking to grow sales outside of China

Negatives

• Significant regulatory uncertainty
• Heightened tensions between the US and China

The average rating of stock market analysts:

Strong buy