Has Alibaba Bottomed? Hints From Q1 FY2025 Earnings

Core View - Alibaba's stock has faced significant downward pressure due to regulatory crackdowns and macroeconomic challenges, but recent earnings improvements suggest that downside risks are already priced in at current levels [1] - The company's strong earnings performance in F1Q25, driven by disciplined spend management and improved operating leverage, reinforces the view that Alibaba is poised for a valuation re-rate if regulatory and macroeconomic conditions improve [1][9] - Alibaba's valuation remains rangebound until there is a positive inflection in its fundamental and regulatory backdrop, with potential catalysts including external partnerships and improved macroeconomic conditions [1][7] E-Commerce (Taobao & Tmall; AIDC) - Alibaba's core TTG segment has shown resilience despite a shift towards lower take-rate Taobao sales, with adjusted EBITA expanding sequentially from RMB 38.5 billion in F4Q24 to RMB 48.8 billion in F1Q25 [2][4] - The company has leveraged AI-powered tools like Quanzhantui to improve monetization rates, targeting consumer purchase trends and driving conversion, which has contributed to sustained improvements in TTG's monetization [3][4] - Alibaba International Digital Commerce (AIDC) continues to deliver robust growth, with double-digit revenue growth driven by effective execution of its diversified supply chain strategy and Cainiao's logistics network [5] Cloud Intelligence Group (CIG) - Alibaba's Cloud Intelligence Group is progressing towards restored double-digit growth in F2H25, driven by triple-digit growth in AI-related revenue and robust adoption of AI products like Tongyi Qianwen [6] - The segment's focus on higher-margin public cloud solutions and integration of AI capabilities across its cloud business and other products like Taobao and DingTalk has driven significant user adoption and revenue growth [6] - Alibaba's cloud infrastructure was selected for broadcasting the Paris 2024 Olympics in China, marking a positive turn in regulatory sentiment and solidifying its leadership in the AI-driven cloud market [6] Logistics (Cainiao) - Cainiao's integration with Alibaba's core commerce operations continues to unlock profit synergies, particularly in cross-border fulfillment services, which have supported AIDC's growth and improved unit economics [5][9] - Despite the withdrawal of Cainiao's IPO, the segment's narrowing losses highlight long-term synergies with AIDC and TTG, driven by vertical integration and global logistics capabilities [5] AI and External Partnerships - Alibaba's AI investments, both internal and external, position the company as a top contender for potential partnerships, such as with Apple for AI-enhanced iPhones in the Chinese market [7][8] - The company's flagship large language model, Tongyi Qianwen, is well-integrated across China's AI value chain, supporting half of China's generative AI firms and 80% of the country's technology companies [7] - Alibaba's investments in AI start-ups like Zhipu, 01.AI, Baichuan, Moonshot, and MiniMax reinforce its global reach and technological capabilities, which could drive future monetization opportunities [8] Financial Performance and Valuation - Alibaba's F1Q25 earnings outperformance highlights improving unit economics across core operating segments, despite a slight revenue miss, driven by disciplined spend management and scale benefits [1][9] - The company's base case valuation is set at $86, with potential upside to $110 per share if inflection catalysts, such as global partnerships or regulatory improvements, materialize [10][12] - Alibaba's capital returns program, with $24 billion remaining in share buyback authorization, provides support for the stock at current levels and potential for further appreciation [16] Conclusion - Alibaba's F1Q25 results demonstrate sustained fundamental progress, driven by synergies from Cainiao integration and consistent earnings improvements across core operating segments [15] - The company's focus on product monetization and AI-driven growth, combined with its capital returns program, positions it for potential stock price appreciation in the near term [15][16]