Alibaba's Profit Meets Expectations, Yet Stock Price Plunges. What's Wrong?

Revenue was 236.45 billion yuan, a year-on-year increase of 7%; adjusted net profit was 29.85 billion yuan, a year-on-year increase of 22%; adjusted earnings per ADS were 12.52 yuan, a year-on-year increase of 23%; net cash flow from operating activities was 163.51 billion yuan, a year-on-year decrease of 10%.

The earnings report shows profitability in line with expectations, although revenue in some segments was lower than anticipated.

Recent developments at Alibaba reveal a new trend: the company is breaking down the walls between its different groups, replicating the experience and quality resources of each business sector into another. For example, the company is replicating the Chinese domestic experience of Taobao to overseas markets and sparking new innovations by combining resources from Ele.me (local food deliveries services) with traditional e-commerce to create “instant shopping”.

Benefiting from the revival of domestic consumption in China and government consumer subsidies, the revenue growth rate of Taobao and Tmall has reached 8.75%, which is higher than the growth rate of 5.42% in the previous quarter. The growth in China business was also driven by a year-on-year increase in the take rate. The improvement in the take rate benefited from the impact of newly added basic software service fees.

Besides, 88VIP members surpassed 50 million, with double-digit YoY growth. The membership program increased customer stickiness and repurchase rates.

Alibaba International Digital Commerce grew by 22% year-on-year to 33.58 billion yuan, becoming a significant driver of overall revenue growth as the company's second-largest segment.

FY 2024 Q3's financial report showed that Alibaba's international business revenue surpassed its cloud business for the first time, becoming a new growth pole for the company.

For this quarter, this segment’s revenue was lower than expected. However, its net loss was lower than both the previous quarter and the same period last year. The early losses caused by initial investments are a common phenomenon for heavy asset business models, and with accelerated revenue growth, international business is expected to achieve profitability sooner.

Alibaba is one of the earliest Chinese companies to go global, but its international revenue has always been at a low level. This year, the US reciprocal tariff policy has led to panic buying among consumers, making Alibaba's international site (AliExpress) an alternative high-value channel to Amazon. However, the purchasing frenzy triggered by Trump's new tariff policies is only a temporary factor. The real reason for the expansion is the improvement in Alibaba's fulfillment capabilities.

Past pain points for Alibaba International included inadequacies in the localization of the payment and logistics systems and issues with ESG. After Jiang Fan took over the overseas e-commerce business in 2022, he brought a series of reforms by replicating domestic experience overseas, including iterations of the product recommendation algorithm mechanism, investment in localized infrastructure, and most importantly, transitioning traditional business operations to a fully managed model for merchants lacking overseas experience, helping these enterprises gain access to international markets with Alibaba's support.

In Southeast Asia, Alibaba's Lazada has been under fierce competition from Sea Limited but has achieved its first quarterly profit in FY2025 Q1 through category focus and supply chain strategy optimization.

Cloud Intelligence Group revenue was 30.127 billion yuan, an 18% year-on-year increase, surpassing market expectations.

Alibaba Cloud benefits from AI. Although its AI product Qwen has had mediocre performance in the consumer market, it has helped grow the B2B segment through integration with cloud services.

However, changes in Alibaba's personnel this year have raised concerns about the stability of the technical team. On April 30, the head of the Application Vision team, Bo Lifeng, resigned. Bo Lifeng led the development of many extended features on the Qwen App at Alibaba. His departure may challenge Alibaba's large model strategy in terms of technical progression, product iteration, multimodal technology integration, and commercial implementation.

In addition, the profit margin of this segment has declined, possibly reflecting the erosion of profits due to depreciation of its CapEx.

Local Delivery Services increased by 10% year-on-year to 16.134 billion yuan, driven by order growth from Amap and Ele.me. The overall loss in this segment continued to narrow compared to the same period last year.

After JD.com joined the food delivery battle against Meituan, and Meituan accelerated its 'instant shopping' service, Alibaba's Ele.me has expanded its original food delivery business to other categories by integrating into the Taobao platform. Ele.me has approximately 4 million active delivery riders, which is currently lower than Meituan's roughly 7.5 million riders, but higher than the number of JD.com's food delivery riders. Customer feedback on the slow delivery of Taobao Instant Shopping indirectly reflects the growth in demand. Its daily order volume has already exceeded 10 million orders, about one-sixth of Meituan's average daily order volume of 60 million in 2024.

The synergy between Taobao/Tmall Group and Ele.me may help Alibaba's Local Services generate additional revenue and further reduce losses.

Overall, Alibaba's quarterly earnings met investor expectations. However, the pre-market stock price decline may reflect disappointment in revenue from certain segments. For example, Cainiao logistics' revenue was significantly below expectations, indicating that the issue of insufficient competitiveness in its self-operated logistics system still exists.

Secondly, although overall cloud business revenue exceeded expectations, cloud business profitability was lower than the previous two quarters, which could also be one of the reasons for the pre-market decline. Nevertheless, Alibaba's business diversity, progress in overseas business expansion, and the recovery of Chinese consumption are still expected to enable the company to deliver good performance in the next fiscal year.