Alibaba stock gains after earnings as company says trends are improving

Shares of Alibaba Group Holding Ltd. closed up 1.8% Thursday after the Chinese e-commerce company topped expectations with its latest financials and indicated that business trends improved as the June quarter wore on.

The company posted net income of RMB22.7 billion ($3.4 billion), or RMB8.51 per American depositary share, compared with RMB45.1 billion, or RMB16.38 per ADS, in the year-earlier period. After adjustments, Alibaba BABA,
+1.79%
earned RMB11.73 per ADS, down from RMB16.60 per ADS a year before but ahead of the FactSet consensus, which was for RMB10.70 per ADS.

Revenue of RMB205.6 billion was essentially flat with the year-earlier total of RMB205.7 billion, although technically it marked Alibaba’s first-ever year-over-year decline in revenue. Analysts tracked by FactSet were expecting RMB203.5 billion.

“Following a relatively slow April and May, we saw signs of recovery across our businesses in June,” Chief Executive Daniel Zhang said in a release. “We are confident in our growth opportunities in the long term given our high-quality consumer base and the resilience of our diversified business model catering to different demands of our customers.”

Chief Financial Officer Toby Xu shared on Alibaba’s earnings call that he saw the “positive trend of recovery continuing through July,” with Alibaba’s management team expecting “that July will be even better than June.” At the same time, he expects it will take “more time” for consumer confidence to build “and sentiment to fully recover.”

CEO Zhang added on the call that while the company faces various “external uncertainties” around the economy, the pandemic and geopolitical tensions, “the only thing we can do at this moment is to focus on improving ourselves.” To that end, Zhang is upbeat about Alibaba’s “meaningful progress” in narrowing operating losses for areas like its Freshippo futuristic supermarkets and the Ele.me food-delivery service.

Alibaba has “certainly shown some clear intent and willingness to reduce losses in the new business investments they made,” said Ramiz Chelat, a portfolio manager at Vontobel Quality Growth. Given that the market has “fully discounted most of the new business areas and doesn’t put any value on areas like international commerce and digital media,” he expects that investors will view Alibaba’s more disciplined approach in a positive light.

Alibaba posted RMB17.7 billion in cloud-computing revenue during the latest quarter, marking 10% growth relative to a year earlier. In the previous quarter, year-over-year cloud revenue growth was 12%.

In regards to the cloud, “the slowdown in revenue growth was a result of multiple factors” such as the macroeconomic slowdown, softer demand from Chinese internet companies, a delay in some hybrid cloud projects due to the pandemic, and the gradual drop-off in use from one large customer, Zhang said on the earnings call.

Chelat said that even when excluding impacts from the large customer, Alibaba’s cloud performance “indicates to some extent that cloud growth still has some way to grow to penetrate larger corporations that may still be holding back in shifting on-premise workloads to the cloud.”

Alibaba’s latest earnings report comes amid a tumultuous period for the Chinese e-commerce giant, which is not only dealing with competitive and macroeconomic pressures, but now also faces a delisting threat from the Securities and Exchange Commission.

The SEC late last week named Alibaba among a list of foreign companies whose auditing processes were not able to be fully inspected by the Public Company Accounting Oversight Board. The company faces the risk of being delisted from the New York Stock Exchange if its audit processes cannot be properly inspected or investigated by the PCAOB for three straight years.

Alibaba executives said earlier this week that they would “strive to maintain [the company’s] listing status on both the NYSE and the Hong Kong stock exchange.” The company then announced late Wednesday that it was adding Irene Yun-Lien Lee, the chairman of Hysan Development Company Ltd. and Albert Kong Ping Ng, the former chairman of Ernst & Young China, to serve as independent directors on its board.

“The new appointments demonstrate the Company’s commitment to corporate governance excellence and diversity at the board level,” Alibaba said in that release.

Alibaba’s stock has lost 3.9% over the past three months, while the iShares China Large-Cap exchange-traded fund FXI,
+1.57%
has shed 3.7% and the S&P 500 index SPX,
-0.08%
has declined 0.6%.

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