Why did Alibaba's stock "open high and close low" after the earnings report? Goldman Sachs: AI and cloud business exceeded expectations, but the statement about "short-term volatility" intensified concerns about e-commerce
Goldman Sachs believes that the key to Alibaba's stock price reversal lies in the company's management warning during the conference call that, due to intensified competition and reinvestment, the growth rate of e-commerce customer management revenue will slow down and profits will experience "short-term fluctuations." However, the firm still maintains a buy rating on the company, stating that "Alibaba's AI + cloud business will continue to lead in China, while the underlying profits of the e-commerce business will stabilize, and the losses from the instant retail business will narrow in the coming quarters."
On November 25th, Alibaba released its latest financial report, delivering an unexpected result in terms of cloud business growth and AI capital expenditures, which once pushed its stock price up 4% in pre-market trading in the US.
However, the market's optimistic sentiment did not last. After the earnings call, the stock price turned downward, ultimately closing down more than 2%.
According to news from the Chasing Wind Trading Desk, Goldman Sachs analyzed in its latest research report that Alibaba's stock price "opened high and closed low" is mainly attributed to investors' new concerns about the e-commerce business. The report stated:
We believe the negative reaction in the stock price is due to the unexpected performance of the AI + cloud business segment, which has reinforced the AI-driven narrative and valuation reassessment this year; however, investor concerns about the e-commerce business have increased, as management commented during the earnings call that due to intensified competition and user investment, customer management revenue (CMR) growth may slow, and the EBITA (earnings before interest, taxes, and amortization) of the Chinese e-commerce business may experience quarterly fluctuations.
The Wall Street Journal article reported that during the earnings call, Alibaba's Chief Financial Officer Xu Hong stated, "It can be expected that customer management revenue and profits will experience short-term fluctuations."
Regarding the customer management revenue of the e-commerce business, the base effect of payment fees and site-wide promotions will have an impact. We started charging payment fees in September last year, so starting from the next quarter, affected by this base effect, the growth rate is expected to slow.
But as we have consistently emphasized, our primary goal is to ensure market share in the medium to long term. In this process, we will continue to decisively invest in consumers and merchants and resolutely promote the business model upgrade of the e-commerce platform. Therefore, in this process, it can be expected that customer management revenue and profits will experience short-term fluctuations.
Goldman Sachs believes that this statement is key to triggering the negative reaction in the stock price. The firm analyzed that the market's concerns stem from "intensified e-commerce competition and user reinvestment," as well as the high base effect brought by software service fees in the same period last year.
Strengthening AI Narrative: The 380 billion capital expenditure target "may be too small," optimistic outlook for cloud business
In stark contrast to the concerns about the e-commerce business, Alibaba's AI and cloud business became the biggest highlight of this financial report.
During the reporting period, Alibaba's cloud business revenue grew by 34% year-on-year, exceeding Goldman Sachs' expectation of 31%. Among them, AI-related revenue has accounted for 20% of external customer revenue and has achieved triple-digit growth for the ninth consecutive quarter.
Goldman Sachs specifically pointed out that Alibaba's proactive stance on capital expenditures (CapEx) further reinforces its determination in the AI strategy The report shows that Alibaba's capital expenditure for the quarter increased by 80% year-on-year to 32 billion RMB, while its competitor Tencent's capital expenditure decreased year-on-year during the same period. Goldman Sachs attributes Alibaba's "more aggressive capital expenditure plan" to its "AI infrastructure capabilities and AI full-stack products," and believes this is similar to Google's dedicated TPU full-stack capabilities.
Alibaba's management even stated in a conference call that the previously announced investment target of 380 billion RMB over three years "may be too small," suggesting that further investments may be added in the future.
Based on strong AI demand, Goldman Sachs maintains an optimistic forecast for Alibaba Cloud's future growth, expecting its growth rates for the December and March quarters next year to reach 38% and 37%, respectively.
Goldman Sachs maintains a buy rating, expecting the company's AI business to remain a leader, while losses in instant retail will narrow
Considering the above factors, Goldman Sachs has adjusted its valuation of Alibaba. The report states that due to a downward adjustment in the valuation of China's e-commerce business, it has decided to lower Alibaba's 12-month target price under the SOTP (Sum of the Parts) method from $205/199 HKD to $197/192 HKD.
Despite lowering the target price, Goldman Sachs still maintains a "buy" rating on Alibaba. The firm believes that the valuation of the company's cloud business remains unchanged, and that the "AI-driven storyline remains intact."
In its baseline scenario, the firm assumes that "Alibaba's AI + cloud business will continue to lead in China, while the underlying profits of China's e-commerce business will stabilize, and losses in instant retail will narrow in the coming quarters."
Analysts indicate that the market may underestimate the potential of its international cloud business and the resulting "globalization" valuation.
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