Alibaba: Anticipating A Growth Rebound In Core Retail Business

Investment Thesis - Alibaba Group Holding Limited's stock has been affected by geopolitical risks, weak consumer spending in China, and increased competition in online retail [2] - The company's 1Q FY2025 earnings were mixed, with revenue falling short of expectations, particularly in the China commerce retail business, while the cloud segment showed slight growth [2] - A bullish view on the stock is maintained due to its non-GAAP P/E ratio trading below 10x, indicating a long-term buying opportunity [2] Core Retail Business - The core retail business, particularly Taobao and Tmall Group, experienced a 1% year-over-year decline in revenue, with total revenue growth of only 4% in the last quarter [4] - Management indicated high single-digit online GMV growth, despite a decline in take rates due to new models with lower monetization rates [4] - A gradual growth rebound in the core retail segment is expected in the second half of FY2025, as the Customer Management segment comprises 71% of Taobao and Tmall Group revenue [4] Cloud Segment - The cloud segment showed a 5.7% year-over-year growth in 1Q FY2025, the fastest since 1Q FY2023, with AI-related product revenue growing at triple-digit rates [6] - The company is increasing capital expenditures related to AI to sustain growth in its AI-driven cloud business [6] Non-GAAP Margins - Non-GAAP margins remained resilient, with an adjusted EBITDA margin of 21% in 1Q FY2025, consistent with the previous three years [8] - The non-GAAP gross margin improved by 110 basis points year-over-year to 40.2%, offsetting a rise in operating expenses [8] Free Cash Flow (FCF) - FCF declined by 56% year-over-year in 1Q FY2025, driven by a drop in operating cash flow and an increase in capital expenditures [10] - The decline in FCF is partly attributed to one-off expenses related to the reduction in the direct sales business, which is expected to be temporary [10] Share Buyback Program - Despite the decline in FCF, the company maintains a strong cash position and has initiated a significant share buyback program, repurchasing $5.8 billion worth of shares in 1Q FY2025 [11] - The company issued $4.5 billion in convertibles at a low interest rate to fund the buyback program, indicating confidence in the stock's undervaluation [11] Conclusion - Ongoing geopolitical tensions may compress the valuation of Chinese stocks, but recovery in consumer spending is crucial for Alibaba's upside [13] - Recent improvements in China's consumption data and the rebound in the cloud business reflect the company's potential for diversification [13] - The stock's risk-reward profile remains attractive, trading at a non-GAAP P/E below 10x, supporting a buy rating [13]