Alibaba (BABA) Q4 2024 Earnings Preview: Will the Chinese Tech Rally Continue?

Source: TradingView

Alibaba will report its fourth quarterly earnings for this fiscal year on Thursday, after the bell. The stock has been performing solidly in the past twelve months with 55% increase, mostly driven by the company’s AI initiatives and recovery in the consumer sentiment in China. Tomorrow we will see whether the recent positive developments will continue into the coming quarters.

Revenue and EPS:

The revenue is expected to be $33.01bln (+8% year-over-year) while the earnings per ADR are expected to be $1.73 (+22% year-over-year). Usually, the final quarter in the company’s fiscal year is the lowest for the e-commerce giant, just after the consumers have spent big during the holidays. However, the recent macro environment, the tariffs and the growing cloud business will surely make an impact on the numbers.

E-commerce:

E-commerce remains the dominant business for Alibaba. The earnings tomorrow will draw a clearer picture of the state of the Chinese consumer confidence. The major competitor of BABA, JD.com, has already reported strong results, thus setting the expectations for BABA earnings quite high. However, unlike JD, BABA has a stronger exposure to US and other overseas markets with its international platforms such as AliExpress, Lazada and Trendyol.  We do expect the management to discuss potential remedial measures when it comes to tariffs. Even though the recent US-China negotiations cooled down the trade tensions, we do believe the tariff-related risk is not entirely gone and the management should prepare for more volatility on this front.

AI and Cloud:

Alibaba is following the steps of the major US cloud players like Alphabet, Amazon and Microsoft by heavily investing in AI and developing their cloud businesses. Their proprietary family of language model, Qwen, is already the major competitor of DeepSeek. Currently, DeepSeek is the most recognizable name on the Chinese AI market, however we believe Alibaba can utilize its dominant cloud position to further push Qwen to clients, which puts Baba and Qwen into a comfortable seat with high upside potential. Last quarter the cloud-related revenue was up 13% and we expect a certain level of growth acceleration.

Alibaba also guided for $52.4 billion in AI-related capital expenditure (CAPEX) over the next three years, thus we expect more light from management with regards to how the capex is being spent.

Divestment in non-core assets

One of the long-term goals for Alibaba is the more streamlined focus towards commerce and AI. This means they are dedicated to gradually divesting their non-core assets. Such non-core assets mostly include their brick-and-mortar stores like Sun Art, Freshippo and RT-mart. Usually these businesses are asset-heavy and low margin, thus by divesting them Baba can focus on more lucrative ventures that bring higher margins and more value to investors. As the deal market in China is reviving, we expect to see this kind of divestitures in near future.

Return to Shareholders

With over RMB 500 billion cash reserves and investments and less than RMB150 billion of debt, BABA has a very strong balance sheet, allowing them to be generous with share buybacks and dividends. However, even if the buybacks and the dividends continue, we believe the management will gradually turn their spending focus on AI investments  

Valuation

After the rally in the past year, BABA stock is currently traded at 19 times the earnings which is not expensive, as this is still a significant discount from what we see in the US peers.

Source: macrotrends.net