Hi everyone, this post is a breakdown of Alibaba’s 3Q21 results. It was originally shared on Twitter here. For convenience sake, we will be sharing the tweetstorm as a single article for easier reading.
If you enjoyed this recap and would like to have access to all of our research, models, and supplementary material, subscribe here:
Alibaba 3Q21 Earnings Breakdown
Alibaba reported a very soft 3Q21 and the stock is down 6%, reaching lows not seen in almost 5 years. Below we break down 3Q in detail. Recall, in our last tweet thread (below), we signaled that last Q was a potential thesis breaking point. (Note the below tweetstorm was mislabeled on Calendar Year 3Q, not Fiscal Year 2Q.)
3Q21 revenues were +10% y/y, which is a 1900bp sequential deceleration from 2Q, and missed consensus by ~1.5%. Adj. EBITDA of RMB 51.3bn missed consensus by ~0.5% and is down ~25% y/y. There are many pieces to this and we will start to unroll it with their China Commerce.
To the positive, in China BABA added 20mn new users to reach 882mn and they noted on the call that annual active customers (AACs) who spend >10,000 RMB on the platform increased y/y.
But total China Commerce revenues grew just +7% y/y, down from +33% y/y last Q, with much of that coming from less profitable 1P retail sales. If you recall our last thread, their CMR (customer management revenue) is what we focused on. (CMR is how much BABA makes from advertising and commissions from Taobao and Tmall.)
Last quarter CMR was +3% y/y which was an eye popping decrease of 1,100bps from the quarter prior. This quarter CMR actually fell -1% y/y for the first time. In our original BABA piece we thought that their monetization rate (fees + ad rev / GMV) was actually low at ~5%.
However, as we showed in great detail in our JD piece, the GMV figure could be much more inflated than we originally assumed. This means take rates could be closer to ~10% on real economic GMV, which is in line to slightly high for the competitive Chinese market. (That said, an ambiguous GMV definition prevents us from proving this – see our JD piece, linked at the end, for more.)
This reframing helps explain why BABA felt the need to reduce their service fees for merchants in order to be competitive. This is exacerbated by weak macro conditions which makes each ecomm player fight harder for their slice of a stagnating market.
Longer term, of course China and the ecommerce market can grow, but their fee rates could be rebased lower forever. It seems increasingly likely that Alibaba was overearning in their core china commerce business and while rejuvenating china market growth could provide relief, this demonstrates their position in the value chain isn’t that strong.
They re-segmented how they report their business profitability so now we can see EBITA for just China Commerce (they reported all commerce businesses together prior). This backs out ~$1.25bn of losses, however this still includes Taobao Deals and Taocaicai which are loss making (which is sort of a silly way to re-segment as it still doesn’t show core profitability).
On this new metric, 3Q21 EBITA was RMB 57.7bn, down -20% y/y. This equates to EBITA margins of 34%, a sequential decrease of 1,100bps from 45% in 3Q20. The key here is whether their incremental investments are accretive, but we don’t have the info to judge that unfortunately.
We know they are successfully gaining traction with 280mn AAC on Taobao Deals now, but we see how unprofitable PDD’s similar business is. (Consumer Local Services, which is a 2nd player next to Meituan, also is of questionable ultimate profitability.)
It is concerning that they include “increasing spending for user growth, including Taobao” as a reason for the margin compression. Their “support to merchants” is a byproduct of the weak macro and competitive intensity increasing.
These two factors go together because with a slower macro backdrop, sales growth comes from taking competitors’ shares. This shows up as shrinking CMR, which is high margin revenue. Along that note, total S&M increased +400bps y/y to 15% of revenue or up +45% y/y.
If this is all “near term” support as they stated on the call, then BABA is a coiled spring for when better conditions prevail. However, it is not clear why it would be short term when there are no signs of competitive factors letting up and as a well established player they should not still be trying to “re-win” their customers.
Moving to their other commerce businesses:
International was +18% y/y and they disclosed losses doubling y/y to ~$450mn for 3Q21. They note Lazada grew >50% though, which is a bright spot, but growing losses draw into question how economic that growth was.
For the first time, Local Consumer Services was also disclosed and is growing 27% y/y, with quarterly losses of ~$750mn, improving 400bps y/y on an adjusted EBITA margin basis to -41%. We always considered this “strategic” and not likely to ever turn a large profit.
Cainiao, their logistics platform, grew 15% y/y for 3Q21 nearing EBITA break-even.
Cloud revenues were +21% y/y in 3Q21, a notable deceleration from 2Q21 growth of +33% (+29% excluding Bytedance rolling off, but don’t have a similar figure excl. them for last quarter). Macro seems partly to blame for the cloud slowdown with slowing demand from internet customers, but they also noted on the call their >50% non-internet customer base. Cloud EBITA was still slightly profitable showing a 1% margin (-100bps q/q) as they continued to invest.
Lastly, Digital Media was essentially flat with a ~$200mn quarterly loss (unchanged -17% margin y/y). However, they recorded an RMB 25bn ($3.5bn) impairment charge in Digital Media, which was oddly not covered on the call in detail and received no questions.
Overall, we think it is unquestionable that macro and regulatory factors are making BABA’s core business look worse than it would be otherwise, but the macro headwinds are also revealing weaknesses in their grip on the consumer and position in the ecomm value chain.
Nevertheless, at just $285bn in market cap or just a $230bn EV after $55bn of net cash it is cheap on financial metrics. LTM FCF equates to a ~5% unlevered FCF yield before backing out loss pools, growth capex and other investment stakes.
Though, FCF shrunk >25% Y/Y in 3Q, which is an improvement from last quarters -45% y/y, but the crucial question is whether BABA’s investments are defensive and thus indicative of the new level of capex/opex necessary to maintain their competitive position or if they are indeed “growth investments” that will lead to an adequate ROIC overtime. With new initiatives in the money-for-value space with low AOVs and more 1P it seems like investments will be elevated for some time with worse returns than their core marketplace.
Lastly, this quarter’s $3.5bn impairment write-down draws further into question their ability to allocate capital. At this price, buying back stock would seem to be the move for a management team with ~$75bn of gross cash. But they only bought back $1.4bn, less than their quarterly SBC of ~$1.5bn. There is still $7.3bn remaining on their current repurchase authorization, but we would have liked to see that increase given their cash pile.
Last quarter we said we would be looking for evidence their “strategic” investments were indeed value accretive instead of necessary subsidy.
It is increasingly looking like the latter.
No doubt if you have the opinion that these factors are all transitory and BABA’s investments will yield strong results in the near future when macro is less of a headwind than that stock is very cheap…
But we will end with what we said last quarter:
If it is in fact a deteriorating business, it can be cheap for a long time…until the moment it’s not. Time is the friend of a great business and the enemy of a poor one and the whole way down it could look cheap.
To learn more about BABA’s many underlying businesses, see our original 24,000 word, members-only deep dive.
We also just released a new report on JD yesterday (!) which has very pertinent info to the Chinese e-commerce ecosystem, a novel framework, and macro and competitive dynamics.
To get access to all of our reports, subscribe today!