Alibaba's Return To Profitability In Q3 2022 Earnings

Alibaba Returns To Profitability In Q3 2022 Earnings

Alibaba’s CEO Daniel Zhang hinted at what BABA’s stock price should really reflect as I discuss Alibaba’s September 2022 quarter financial performance.

Video Contents:
-BABA Stock Is Rebounding
-Alibaba’s September 2022 Performance
-Positive Profits Again
-Singles’ Day November 11 This Year
-Share Buybacks, Free Cash Flow, Net Cash
-Alibaba Cloud Revenue Slowing Rapidly
-Alibaba Stock Price Hint From CEO Zhang
-BABA Delisting Status

In late October, the markets sold off Chinese stocks in freaking out over President Xi Jinping getting a third term in office.

BABA fell 20% from $72 per ADR share on October 21 to as low as $58 a share on October 24 before recovering into the $80 range by Friday, November 18.

The fact that BABA traded below its 2014 IPO price of $68 per share (adjusted for inflation is like $85 a share) suggests that foreign (western) investors had all but given hope on this stock until calendar Q3 2022 earnings data came out on November 17.

So maybe there’s starting to be light at the end of the tunnel for Alibaba!

In the quarter ending September 2022, Alibaba beat on profits by delivering $1.85 per ADR share compared to analyst expectations of $1.66 per ADR share. Revenues were up 3% YOY but they only delivered revenues of $29.12B compared to analyst expectations of $29.44B, missing by about $32 million. I don’t really give much weight to analyst stuff, but maybe it partially explains by the stock jumped back into the $80 a share range.

During the earnings webcast, CEO Zhang said that they delivered a solid quarter in an uncertain macro environment. In spite of business challenges, Alibaba managed to increase their non-GAAP EBITA by 29% YOY. Even though I wouldn’t normally give much weight to quarterly EBITA (or EBITDA) figures, it seems somewhat significant that Alibaba has finally broken the negative streak in the 5 quarters prior to calendar Q3 2022.

Alibaba’s Adjusted EBITA:
Q3 2022 +29%,
Q2 2022 -18%,
Q1 2022 -30%,
Q4 2021 -27%,
Q3 2021 -32%,
Q2 2021 -8%,
Q1 2021 +14%

Before the current reported quarter, the last time Alibaba had a positive Adjusted EBITA rate was in the quarter ending March 2021! No wonder its stock price plummeted mightily over the quarters June 2021 through June 2022.

Despite logistical disruptions related to the public health policy, Alibaba seemed to have a decent Singles’ Day November 11 shopping festival result. While they didn’t share the total gross merchandise volume (GMV) of 11.11.22, apparently sales were in line with what they were last year. If Double 11’s GMV was comparable to last year’s $84.5B, then it should be close one has to assume.

They have done a total of $18B share repurchases out of their current $25B buyback program, and their board authorized for an additional $15B of share buybacks. So they can still do $22B future buybacks and they did about $2B of buybacks in the September 2022 quarter.

Free cash flows improved by about $1.9B compared to the previous September quarter, and was a lot better than the June 2022’s quarter of an $213M increase.

This time, Alibaba displayed their net cash differently across two line items. I assume their final net cash when “excluding restricted cash and escrow receivables” is $45.5B, down about $5.3B from June 2022. It’s still a pretty good chunk with which to keep doing stock buybacks.

I especially like keeping tabs on how the Alibaba Cloud is faring. After several years of rapid cloud revenue growth, it’s seemed to have slowed down to a crawl lately. But at least Alibaba Cloud has remained profitable since 2021.

Compared to the growth rates put up by Amazon Web Services, Alibaba is falling behind on its revenue growth rate.

Their earnings highlights seemed to convey that this declining cloud revenue growth rate is mainly due to a big Internet customer (lets assume ByteDance’s TikTok) not using their overseas cloud services anymore.

CEO Zhang hinted at what Alibaba’s stock price should really be when he said that “during the 8 years from Alibaba’s IPO in September 2014, the quality and scale of our business has improved significantly. Alibaba’s revenue today is 12x what it was during the same period in 2014. Adjusted EBITA is 4.5x what it was during the same period in 2014. Free cash flow is 4x that of what it was in 2014.” And China’s GDP has almost doubled 59T RMB in 2013 to 114T RMB in 2021.

If you multiply Alibaba’s $68 IPO by the 4.5x earnings growth, that would make you think the stock price should be at least $306, if not closer to $360 if you multiplied 4.5 by the current $80 stock price. This is kind of where Alibaba was trading before the infamous Jack Ma speech in October 2020. Who knows, maybe Alibaba is finally staging a comeback and might return to its previous stock price glory days and then some.

In December we’ll get an update as to whether some Chinese stocks might get delisted, and I’m sure Alibaba’s management hopes that BABA won’t be on the chopping block.

After all, as Zhang said, “Alibaba’s goals highly are aligned with China’s long term goals. We believe Alibaba will play an important role in the digitalization process in China and around the world.”

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