Alibaba, an AI service provider, deserves revaluation.

Text｜Peng Qian

Editor｜Qiao Qian

Alibaba presents the most outstanding quarterly report after more than one year of its reform.

Overall, Alibaba Group's revenue increased by a high single-digit percentage year-on-year, reaching 8%; the adjusted operating profit turned positive, with a year-on-year growth of 4%; and the non-GAAP net profit increased by 6% year-on-year. All core financial indicators exceeded market expectations.

Data Source: Financial Report, Charting: 36Kr

By business segment, in terms of revenue, the international business still ranked first in year-on-year growth rate, reaching 32%; Alibaba Cloud and local life services both achieved double-digit year-on-year growth, at 13% and 12% respectively; Taotian and Great Entertainment achieved single-digit growth, while Cainiao's growth rate slowed down.

In terms of profits, e-commerce and cloud are still in a high-investment stage, but the profit margins of Taotian and Alibaba Cloud have shown an improving trend; the losses of sub-businesses such as international business and Cainiao have expanded, but with the overall growth of the group's revenue, after three fiscal quarters, Alibaba's adjusted operating profit in Q4 finally stopped falling and rebounded.

Data Source: Financial Report, Charting: 36Kr

The outstanding quarterly report has also received a very positive market response. After the financial report was released, although the overall performance of US stocks was not good, Alibaba's US stocks rose sharply before the market opened, and once rose by more than 10% at the opening, which is its best performance in the earnings season in the past two years; today, Alibaba's Hong Kong stocks also rose by more than 10% at the opening.

Since the Lunar New Year, due to the computing power dividend of Alibaba Cloud brought by the popularity of DeepSeek, and the impact of the news such as the cooperation between Apple and Alibaba, after experiencing a period of more than two years of sluggish stock prices, the market has shown signs of reevaluating the value of Alibaba. Wind data shows that in the past 20 days, Alibaba's US stock price has risen by 45%, and the Hong Kong stock price has hit a new high in nearly three years, rising by 55.22%.

In this quarterly earnings conference that lasted more than 90 minutes, the vast majority of topics revolved around AI and cloud. Wu Yongming even said directly: "Alibaba must seize this once-in-a-decade industry opportunity. In the next three years, the investment in AI and cloud will exceed the total of the past 10 years."

The core business is stable, the second growth curve is beginning to rise, and Alibaba has finally climbed out of the trough.

E-commerce market is stabilizing

At the end of 2023, Wu Yongming, CEO of Alibaba Group and Taotian, once emphasized: "In the most competitive e-commerce market in China, Taotian Group's GMV will continue to rank first." Wu Yongming also made a military order, expressing confidence that Taotian will return to the growth track in 2024.

Looking back at Taotian's performance in the past year, Wu Yongming has fulfilled his promise. According to 36Kr's understanding, Taotian's GMV has achieved a high single-digit growth overall, about 8 trillion yuan, and the growth rate is basically the same as that of the e-commerce market - between 2022 and 2023, Taotian significantly lagged behind the growth rate of the e-commerce market in each quarter, and even almost did not grow. During the same period, the growth rates of Pinduoduo and Douyin E-commerce have slowed down significantly.

This is based on Alibaba's continuous investment in e-commerce. The marketing expenses in Q4 continued to rise sharply, with a year-on-year growth rate of still as high as 27%, an increase of 9 billion yuan compared to the same period last year. In addition to investing in services and experiences, during the Double 11 period in Q4, Taotian also issued the largest-scale category coupons, jointly subsidizing core categories with merchants. According to 36Kr's understanding, the largest category, clothing, achieved a long-awaited high double-digit growth in this Double 11. With the incentive of national subsidies, originally weaker high-customer-unit categories such as 3C also achieved good growth. Wu Yongming also previewed in advance at the earnings conference of the previous quarter that "Double 11 achieved strong growth".

In addition, 88VIP continues to achieve high double-digit growth, reaching 49 million people, and the cooperation with WeChat has also brought considerable new user growth, which continues to drive the stable growth of order volume and GMV.

The gradual stabilization of GMV growth rate and the improvement of monetization rate have jointly driven a significant growth in CMR (Customer Management Revenue). At the earnings conference at the beginning of last year, Wu Yongming clearly stated that it is expected that in the next few quarters, the growth rate of CMR will gradually match the growth rate of GMV. This goal is expected to be achieved around Q3 and Q4 of 2024, reaching about 10%. In Q4, Taotian's CMR increased by 9% year-on-year, hitting a new high in the past one and a half years, basically achieving the goal set by Wu Yongming.

Data Source: Financial Report, Charting: 36Kr

Full-site promotion and the 0.6% service fee that started to be charged in early September are important contributors to the improvement of the monetization rate. After nearly one year of iteration, the penetration rate of full-site promotion has reached the previously set target, and the willingness of small and medium-sized merchants to pay is also increasing.

Overall, the growth rate gap between CMR and GMV in this quarter is almost eliminated, indicating that Taotian has found a good balance between growth and income, alleviating the problem of "e-commerce trading profits for growth" that was widely worried by the market previously. Even though it is still in a high-investment stage and the quarterly marketing expenditure exceeds expectations, due to the significant increase in revenue, Taotian's operating profit in this quarter has turned positive again.

At the earnings conference, the management mentioned for the first time the main strategic goals of the domestic and international e-commerce businesses in the new fiscal year. Jiang Fan, President of Alibaba's E-commerce Business Group, said, The next goal of domestic e-commerce is to continuously stabilize market share, optimize the business environment for merchants, and continue to improve user stickiness.

Since becoming the first "anti-involution" e-commerce platform last year, not only has Taotian relaxed the "only refund" policy, but it has also launched several merchant preferential measures such as "Return Insurance" and invested 10 billion yuan in off-site drainage. This month, Alibaba has also launched plans such as the "Blue Star Project" for brand merchants in several core categories to help merchants attract new customers from both on-site and off-site to seek growth.

It is worth noting that the year-on-year revenue growth rate of international business is still as high as 32%, but the loss has expanded by 57% year-on-year. Regarding this issue, Wu Yongming said: "The overseas business can achieve a single-quarter profit in the new fiscal year."

According to Jiang Fan, the profit path of the international business B2C business is gradually becoming clear, and the UE is continuously improving. In some countries, it also cooperates with local platforms to continuously improve its profitability. For example, in South Korea, a major market, a joint venture has been established with Shinsegae Group to operate AliExpress Korea and Gmarket.

This shows that in the complex international political and economic environment and fierce market competition, international business will take "low-key growth" as the main goal, minimizing losses to the greatest extent while maintaining a stable growth rate.

In general, Taotian is still Alibaba's largest profit-making machine, with a contribution rate to the Alibaba Group of more than 100%. With the sale of the offline retail business, the expected turnaround of the international business from losses to profits, and the expected continued narrowing of losses in various sub-businesses, Taotian's ability to provide financial support will be further guaranteed, and Alibaba's profit performance in the next few years is also expected to maintain a good growth to support its continued large-scale investment in AI and cloud.

"E-commerce" Alibaba wants to tell the story of "AI service provider"

Charlie Munger once said that he overestimated Alibaba's strength in the technology field, bluntly stating that "Alibaba is a damn retailer", which limits Alibaba's storytelling ability in the capital market.

Alibaba's insistence on investing heavily in technology and cloud for more than a decade was once considered by the market as a thankless effort. In addition, in recent years, Alibaba Cloud once fell into a growth bottleneck, and the organizational turmoil caused by the withdrawal of the listing led to a moment of valuation being cleared, which has repeatedly caused market concerns. Just over a year ago, the market still had many questions about Wu Yongming's "AI-driven" strategy.

The turning point occurred at the beginning of this year. The release of the deep reasoning model DeepSeek RI and Alibaba Tongyi Qwen2.5-Max has become a key inflection point in reversing market perception.

DeepSeek's low-cost and efficient model challenges the concept that traditional AI development requires a large amount of capital investment. Its open-source strategy with Alibaba Tongyi Qianwen enables more developers to participate in the innovation of AI technology, challenging the closed-source model of Open AI, and effectively breaking the near-monopoly of US AI technology.

JPMorgan also pointed out that China's previous technical strength in the AI field was underestimated, and the gap between China and the US in AI is not as large as imagined. Investors should pay attention to the innovation ability of Chinese technology companies, and then the market's confidence in Chinese technology stocks began to recover rapidly.

Subsequently, Alibaba announced the integration of Deepseek, Chairman Cai Chongxin confirmed that Alibaba won the AI large order from Apple, and founder Jack Ma attended the government symposium, all of which further released positive information to the market, triggering a revaluation of businesses such as Alibaba Cloud and also being the main reason for Alibaba's recent sharp rise in stock price. "Buy Alibaba, get Alibaba Cloud for free" has become a hot topic in the secondary market recently. According to the predictions of JPMorgan and other institutions, calculated based on the valuation of 6.5 - 10.5 times of US SaaS companies, Alibaba Cloud can drive Alibaba's stock price to rise by at least 14% - 39%.

In fact, Apple's evaluation list of partners is quite luxurious, including companies such as Baidu, Tencent, ByteDance, and Deepseek. With the leading technical strength in China, mature commercialization ability (B-side service experience), and years of accumulated consumer data, Alibaba, with the strongest comprehensive ability and the most complete technical layout, stands out among many well-known technology companies.

The cooperation effect between Alibaba and Apple is difficult to evaluate in the short term in terms of "making money or not". The greater value is the market's recognition of Alibaba's technical strength. After all, Apple's AI partner in the international market is the top Open AI. Of course, in the long term, Alibaba Cloud has a great possibility of customer acquisition and revenue growth. On the one hand, this may open the Chinese iOS user market with over 200 million users for Alibaba's Tongyi Qianwen large model; on the other hand, with Apple as a precedent, more large customers are on the way, which may promote Alibaba Cloud to continue to achieve double-digit revenue growth.

Since Wu Yongming's reform, Alibaba Cloud's financial performance has improved significantly. Not only did it turn losses into profits in the past year and achieve a double-digit year-on-year growth in operating profit, but it also returned to a long-awaited double-digit year-on-year revenue growth in Q4, setting a new high in the past three years, and the revenue brought by AI-related products achieved a triple-digit growth.

In the new technology cycle, Alibaba Cloud will also shift from the cost reduction and efficiency improvement and profit protection in the past two years back to the stage of investing for growth, and explore more commercial possibilities.

Currently, Alibaba's layout in AI is mainly at three levels.

First, providing computing power services, which is based on Alibaba Cloud and also has Tongyi Qianwen to provide large model services.

Second, as the largest e-commerce platform in China, Alibaba regards AI as a key driver to enhance its competitiveness and applies it in its own ecological scenarios, in addition to continuously increasing investment in AI to C. According to 36Kr's understanding, many businesses of Taotian have been required to be fully AI-enabled, and the results are expected to be seen within this year.

Furthermore, Alibaba also conducts extensive investments in AI startups including Dark Side of the Moon. According to a report by The Information, Deepseek may open up external financing, and Alibaba has also shown investment intentions.

Wu Yongming stated at the earnings conference that in the next three years, Alibaba will focus on AI as the strategic core and increase investment in three aspects: AI infrastructure, basic model platform and AI native applications, and AI transformation of existing businesses.

For this, he also gave a relatively clear investment figure: the technology investment in the next three years will exceed the total of the past 10 years. According to Goldman Sachs' estimates, only the expenditure on cloud computing has reached about 130 billion yuan in the past 10 years, and the overall technology investment of the Alibaba Group is twice that amount.

However, this capital scale is still not large compared to American technology companies. Despite the astonishing investment, technology giants are still willing to make sacrifices to buy this expensive technology ticket to the future. In early February this year, Microsoft, Amazon, Google, and Meta announced that they will invest a total of 320 billion US dollars in the AI field, a significant increase from 230 billion US dollars last year.

The market focus has finally returned to Alibaba, and the management has shown the strongest confidence in the past two years at the earnings conference. Confident statements such as "Quark is the largest AI search" and "Top-notch large model" have repeatedly appeared. Alibaba, which has climbed out of the trough and obtained a valuable ticket to the AI era, will accelerate its pace.