Earnings Review of Alibaba dated 26May2022 - has the giant awakened?

Alibaba released its recent earnings on 26 May 2022. 

I will focus more on YoY performance in this review as this would provide a more balanced overview of the progress.

Latest Earnings beat for Q1/2022 

Here is the extract from their earnings report pertaining their fiscal year ended March 31, 2022:

Revenue was RMB853,062 million (US$134,567 million), an increase of 19% year-over-year that was primarily driven by the revenue growth of the China commerce segment by 18% year-over-year to RMB592,705 million (US$93,497 million), Cloud segment by 23% year-over-year to RMB74,568 million (US$11,763 million) and International commerce segment by 25% year-over-year to RMB61,078 million (US$9,635 million). Excluding the consolidation of Sun Art, our revenue would have grown 14% year-over-year to RMB770,734 million (US$121,580 million).

Income from operations was RMB69,638 million (US$10,985 million), a decrease of 22% year- over-year. Excluding one-off and certain other items as identified in “Full Fiscal Year Operational and Financial Results” below, income from operations would have decreased by RMB41,683 million year-over-year, primarily due to our increased investments in Taobao Deals and Taocaicai, our increased spending for user growth, as well as our support to merchants. Adjusted EBITA, a non- GAAP measurement, decreased 23% or RMB40,056 million year-over-year to RMB130,397 million (US$20,570 million).

Net income attributable to ordinary shareholders was RMB61,959 million (US$9,774 million) and net income was RMB47,079 million (US$7,427 million), showing year-over-year decreases of 59% and 67%, respectively, primarily due to the net losses arising from decreases in the market prices of our equity investments in publicly-traded companies, compared to net gains from these investments in last year, which we excluded from our non-GAAP measures. Non-GAAP net income was RMB136,388 million (US$21,515 million), a decrease of 21% year-over-year.

Diluted earnings per ADS was RMB22.74 (US$3.59) and diluted earnings per share was RMB2.84 (US$0.45 or HK$3.50). Non-GAAP diluted earnings per ADS was RMB52.69 (US$8.31), a decrease of 19% year-over-year and non-GAAP diluted earnings per share was RMB6.59 (US$1.04 or HK$8.13), a decrease of 19% year-over-year.

Net cash provided by operating activities was RMB142,759 million (US$22,520 million), a decrease of 38% compared to RMB231,786 million in fiscal year 2021. Free cash flow, a non- GAAP measurement, was RMB98,874 million (US$15,597 million), a decrease of 43% year-over- year from RMB172,662 million in fiscal year 2021, mainly due to a decrease in profit and the full payment in the amount of RMB18,228 million of the Anti-monopoly Fine.

Our digital infrastructure, such as smart logistics and cloud computing, which enables and underpins our major commerce, local services and entertainment businesses, equips us with unique technology-driven capabilities to meet changing consumer demand and help our enterprise customers and partners achieve digital transformation in China and internationally. We are committed to investing and developing these digital infrastructure businesses, which we believe will support sustainable growth and yield attractive returns on investment over the long term.

Observations

Users and Spending of BABA

• For the twelve months ended March 31, 2022, their global consumer-facing businesses served approximately 1.31 billion annual active consumers and generated RMB8,317 billion (US$1,312 billion) in GMV. Thus, the average user will spend USD$1,000 over 12 months.   
• there is an annual YoY growth of 177 million users (AAC - Annual Active Customers), a 15.6% increase with the international account accounting for strong growth of 26.5%.  
• One time fine of RMB$18.2B imposed for China's anti-monopoly law.  This is a non-recurring item.

Let us look into the Financials for now (based on YoY performance) - using RMB$:

Financial highlights

• There is growth of 19% of the total revenue from $717B to $853B
• There is a one time expense from fine for anti monopoly law of $18.2B
• Without this fine, the income from operations will be $87B instead of $89B
• I am glad to see that the share-based compensation expense has dropped 52% (from $50B to $23B) and 6% drop from amortization of intangible assets.
• Thus, it is not surprising that the (diluted) earnings per share dropped 58%.
• It is comforting to see that we are experience over 20% growth in international commerce, local consumer services, Cainiao, Cloud and innovation initiatives & others.
• The 2 business sectors that did not perform as well were China commerce at 18% growth and 3% for Digital media and Entertainment
• Inevitably, the net income suffered a 67% drop from $143B (2021) to $47B (2022).
• One thing or concern comes from the 173% increase in impairment of goodwill and investments (that went from $14.7B to $40.2B).

Cash Flow and Balance Sheet

• There is an increase of 16% coming to purchase of property and equipment due to purchase of property and equipment excluding land use rights and construction in progress relating to office campuses.
• There is a 29% increase of CAPEX but it is expected to reap better returns or costs reduction in the future.
• For the last one year, Alibaba has spent $61.2B to repurchase their shares, a stellar 7820% increase.
• Net Cash from operating activities saw a drop of 38% from $231B to $142B.  This is significant and something that we should monitor.
• While free cash flow suffers a drop of 43%, Alibaba ended the year (31 Mar 2022) with a free cash flow of $98B.

While the FCF drop is an area of concern but we should take comfort in the revenue growth, reduced expenses as Alibaba continues to navigate in a difficult global environment where the pandemic, Ukraine war and supply chain challenges plague our world.

What do the Technical indicators say about the stock?

1Day chart of Alibaba as of 27May2022

From the 1D chart above, BABA stock looks to have turned a corner following the earnings report.  The rally of 14.79% is backed by strong volume (45.2M) was a strong push from the average volume of 33.9M.  Both Stochastic and MACD indicators have crossed over at the bottom, a typically "bullish" signal, supported by strong trading volume.  Another signal came from the converging of the 3 EMA lines (8, 13 & 20) showing a possible trend change from down to up.

Backed with sound fundamentals, we can remain bullish for the company though recession threatens on the horizon.  However, we should pay attention to their revenue growth, net income growth, improved FCF and lesser debts.  We are seeing growth in the various sectors but this must be sustained so that they have durable competitive advantages.