Why Alibaba's Cloud & Investments Will Improve Growth - Q4 2021 Earnings

Why Alibaba’s Cloud & Investments Will Improve Growth

I share my key takeaways from Alibaba’s latest Q4 2021 earnings results and how their focus on cloud, stock buybacks, and investments in their ecommerce businesses will help their growth and fundamentals improve.

Video Contents:
-Intro Alibaba Is Growing Slower
-Alibaba’s Cloud & Total Revenue Growth
-One Billion Chinese Consumers
-What BABA Must Do To Overcome Headwinds
-What Management Is Doing To Improve Performance
-Alibaba’s Cloud Will Be HUGE In The Future
-Alibaba Cloud vs Amazon Web Services (AWS)
-Cash & Share Buybacks Keep BABA Afloat
-Investors Waiting For BABA To Improve

Unluckily for Alibaba, they released their fourth quarter 2021 earnings results before market open on Thursday, February 24, 2022, the same day that Russia officially attacked Ukraine. While this conflict initially sent markets tanking with the Nasdaq briefly in bear market territory and the S&P 500 down 14% from its all time high — well into correction territory — major indices have since recovered while BABA’s stock still remains knocked down.

This is due in part to their slowing revenue growth and their huge capital expenditure (CapEx) investments into their logistics network, cloud infrastructure, and ecommerce businesses such as Taobao Deals and Taocaicai that limited their financial performance in the fourth quarter.

Even though Alibaba is still growing, they are growing at a slower rate as they are facing a number of headwinds that include: a slowing Chinese economy, depressed real estate and debt issues in China, reduced consumer spending, ongoing regulatory pressure, and increased competition.

Some positives include how their Annual Active Consumers (AAC) grew from 953 million to 979 million in China during the quarter. They are on track to deliver 1 billion Chinese AACs by the end of their fiscal year, which would be March 2022. So they will soon achieve mass adoption by enabling 71% of the Chinese population to use and benefit from Alibaba’s products and services.

CEO Daniel Zhang said, “With 1 billion high-quality AACs, we believe we have substantially captured all consumers with purchasing power in China. We focus on shift from new user acquisition to user retention and ARPU growth.” He also added that “Taobao Deals has been the major contributor to our new user acquisition.”

Zhang also highlighted “Despite the impact from slowing retail sales and intensifying competition on our China commerce business, the net year retention rate of new AACs acquired in calendar year 2020 was 86% in 2021.”

Another impressive figure to me is how they said their Average Revenue Per User (ARPU) per AAC was “over RMB 10,000 annual spend on our platform” ($1583 per year or $132 per month). Once they hit that 1 billion AAC mark, they will soon focus on driving higher revenues across various product categories.

Alibaba’s management is focusing on investing in their growing businesses, especially the cloud, to overcome headwinds and to improve financial performance in the future. I find it especially exciting how massive the growth opportunities are for cloud in China as they anticipate that the Chinese cloud market will be a US $154 billion opportunity by 2025, up 5x from US $32 billion in 2020.

If Alibaba is able to resume a 30%+ growth rate in cloud market share, they could potentially grow 5x from having about US $12 billion in 2020 to US $60 billion by 2025 of the Chinese cloud market. While Alibaba currently has about 38% of the Chinese cloud market, they are slightly losing market share.

In comparing Alibaba Cloud to Amazon Web Services (AWS), right now AWS is 4x as big as Alibaba Cloud. At the projected average 21% 5-year growth rate for US cloud, AWS could grow its market share from $53B now to $93B by 2025, only about a 1.5x size advantage over BABA by then.

Management had said that if it had not been for one top cloud customer not using Alibaba’s overseas cloud (I suspect is is a Bytedance subsidiary), then they said cloud revenues would have been 29% growth year on year instead of the 20% growth year on year that it ended up being.

The future CFO Toby Xu emphasized how BABA’s “current share price does not fairly reflect the value of the company.” So they “repurchased approximately 10.1 million of our ADS for approximately USD 1.4 billion” under their US $15 billion share repurchase program. ADS is American Depository Shares or Receipts (ADR).

And in the “nine months ended December 2021, we repurchased approximately 42.2 million of our ADS for about USD 7.7 billion, representing 51%” or half of their share buyback program.

So Toby Xu continued, “at current price levels, we plan on continuing our share repurchases. At the same time, we will maintain a strong cash position [of about US $59.5 billion] that gives us the financial flexibility for future investments.”

Investor sentiment seems mixed as many superinvestors are buying as a good amount are also reducing or selling out of BABA. I wonder if many large institutional investors on Wall Street are waiting for the geopolitical coast to be clear before they will pour back investment dollars into Alibaba as their fundamentals improve in the future. These investors seemed to have confidence and conviction in Alibaba before October 2020, so maybe they will eventually believe in the stock again once the regulatory environment and financials improve for BABA.

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