Alibaba’s cloud unit shines even as rivalry heats up in China’s ‘instant commerce’ space

Adam

Summary:

Alibaba beat profit forecasts with net income up 78%, driven by strong cloud growth and e-commerce revival. Despite heavy instant commerce investment and softer revenue, shares surged 40% this year on AI-fueled cloud momentum.

Alibaba posted a better-than-expected bottom line in the June quarter fueled by accelerated sales at its cloud computing unit and a continued revival of its e-commerce business.

Still, the Chinese giant’s revenues came in under analyst forecasts.

Alibaba’s stock was up around 4% in premarket trade in the U.S. after initially dipping.

Here’s how Alibaba did in its fiscal first quarter ended June, compared with LSEG estimates:

Revenue: 247.65 billion Chinese yuan ($34.6 billion), versus 252.9 billion yuan expected.

Net income: 43.11 billion yuan, compared with 28.5 billion yuan expected.

Revenue rose 2% year-on-year, while the company’s net income was up 78%. Alibaba attributed the increase in profit to gains in some of its equity investments and the disposal of Turkish e-commerce firm Trendyol. This was offset by a decrease in income from operations.

However, excluding investment gains, Alibaba’s net income would have decreased 18% year-on-year as it continues to invest in the cut-throat instant commerce space in China.

Alibaba has a delicate balancing act between investing areas such as artificial intelligence and new e-commerce models, while showing that it can continue to grow in China’s competitive market. So far, investors have rewarded Alibaba with a 40% rally in its U.S.-listed stock this year.

That’s partly thanks a continued growth acceleration at its key cloud computing division as well as improvements at both its China and international e-commerce businesses.

Cloud accelerates

Cloud computing was one of the bright spots.

Alibaba said revenue at the division totaled 33.4 billion yuan, up 26% year-on-year. That was faster than the 18% growth rate seen in the previous quarter. Alibaba’s cloud unit is seen as key to the company monetizing artificial intelligence, much like Microsoft or Google.

“Driven by robust AI demand, Cloud Intelligence Group experienced accelerated revenue growth, and AI-related product revenue is now a significant portion of revenue from external customers,” Alibaba CEO Eddie Wu said in a statement.

Investors are focused on Alibaba’s investments in artificial intelligence, where it has become a major global player. The company has aggressively launched various AI models and is selling services through its cloud computing division.

While Alibaba has focused open source AI — meaning its models can be used for free and built on by developers — it also sells AI services through its cloud unit.

Alibaba said AI-related product revenue “maintained triple-digit year-over-year growth for the eighth consecutive quarter.”

Adjusted earnings before interest, taxes, and amortization (EBITA), a measure of profitability, jumped 26% year-on-year in the cloud unit.

New York-listed Alibaba shares have risen more than 40% this year as revenue growth at its core China e-commerce business has improved and its cloud computing division has accelerated.

The company is dealing with uncertainty in the Chinese economy, which lost momentum in July. Earlier this year, Beijing had launched initiatives to boost consumption.

‘Quick commerce’ wars

Alibaba’s core e-commerce business, which accounts for more than 50% of revenue, had mixed results.

Overall, revenue rose 10% year-on-year to 19.6 billion yuan. Customer management revenue, which Alibaba makes off of selling marketing and other services to merchants on its platform, jumped 10%. CMR accounts for the bulk of e-commerce revenue.

However, adjusted earnings in the division fell 21% in the quarter on an annual basis. That’s because Alibaba has been investing heavily in so-called quick or instant commerce. This is a feature introduced on Taobao, one of Alibaba’s main Chinese e-commerce apps, this year that provides deliveries of certain products in China within an hour

Competition is intense in China, with rivals including food delivery giant Meituan and JD.com, all involved. And the rivalry is already taking its toll on some of these firms, with Meituan this week posting an 89% plunge in second-quarter adjusted net profit.

Alibaba’s own quick commerce division brought in revenue of more than 14.8 billion yuan, or $2 billion, rising 12% year-on-year.

Still, investors appear okay with Alibaba’s instant commerce investments, because its cloud computing business continues to grow, while its international online shopping unit — which includes AliExpress — saw a 19% jump in revenue in the quarter as losses narrowed.

Source: cnbc

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