$Alibaba(BABA)$ . (BABA, BUY) - 3Q Beat Driven by E-commerce and Cloud; Rising Capex to Seize Growth Opportunities; Maintain BUY and Increase PT to $145
We are maintaining our BUY rating and increasing PT to $145 (was $115) after BABA reported strong F3Q results with both revenue and profits above expectations. The company has completed major offline asset divestments to focus on e-commerce and AI + Cloud.
Total revenue grew 8% y/y (accelerated 3pts from last quarter) and adjusted EBITA grew 4% for the first time since F3Q24. TTG CMR grew 9% (accelerated 7pt), with both take rate and GMV up y/y with larger contribution from take rate expansion. Take rate expansion was mainly driven by the 0.6% software service fee and increased penetration of Quanzhantui. Looking forward, BABA is confident that take rate will continue to expand on a y/y basis while GMV growth will depend on macro and user experience investments.
For Cloud, EBITA margin improved y/y to 9.9% (from 8.4% last year), while revenue growth also accelerated to +13% y/y (from +7% last quarter). AI-related revenue saw triple-digit growth for the sixth consecutive quarter. BABA expects strong demand for compute power driven by AI. To capture this AI trend, BABA expects AI & cloud CapEx will exceed the last 10 years' total spending over the next 3 years. Investment should evenly spread across three years, but quarterly fluctuations expected due to supply chain constraints. Will have short-term impact on profitability due to depreciation, but high demand for AI infrastructure will offset costs. Long-term, AI is expected to significantly improve margins across Alibaba's business units.
AIDC revenue was up 32% y/y (3pts faster than last quarter), mainly driven by AliExpress and Trendyol. AIDC EBITA loss widened to RMB 4.9B (vs. 2.7B last quarter), due to heavy promotional campaigns during key shopping festivals and continued investments in AE Choice. But BABA is expecting first profitable quarter in FY2026 driven by stronger unit economics in AliExpress & Trendyol and scaling efficiencies in key markets. Investment in international expansion will continue, but with a focus on profitability rather than aggressive growth
BABA continued aggressive buybacks, reducing outstanding shares by 5% over the past 9 months with US$1.3B repurchased in F3Q. the company is Selling Sun Art for US$1.6B & Intime for US$1B to streamline focus on core businesses. Also issued US$5B in bonds (USD & RMB) to lower financing costs and extend maturities.
Looking ahead, BABA expects most loss-making segments (e.g., Local Services, AIDC) are expected to reach breakeven within 1-2 years. Cloud profitability should improve over time as AI adoption scales. In addition, E-commerce margins will remain stable, with a balance of growth investments & monetization improvements.
F3Q revenue largely in line 2%/1% above Tiger/Street. TTG revenue grew 5% y/y, accelerating 4pts from last quarter. Specifically, CMR grew 9% y/y (vs. +2% last quarter) and direct sales declined 9%. AIDC grew 32% y/y (vs. +29% last quarter), primarily driven by int'l retail +36%. Cainiao -1% y/y (vs. +8% last quarter) as TTG has taken over some logistics platform roles previously handled by Cainiao. Local consumer services grew 12% y/y (vs. + 14% last quarter). Cloud revenue grew 13% y/y, accelerating 6pt q/q. DME grew 8% y/y. All Others revenue (DingTalk, Sun Art, Freshippo, Alibaba Health, Lingxi Games, Intime, etc.) grew 13% y/y (vs. +9% last quarter), primarily driven by Freshippo and Alibaba Health.
Non-GAAP EBITDA 4%/3% above Tiger/Street. Gross profit margin was 129bps/232bps above/Street, as BABA continued to scale back non-strategic low-efficiency businesses. By segment, TTG's EBITA margin was 44.9% in F3Q, down 1.5pts y/y, due to investments in user experience, but more than offset by the increase in CMR. Int'l Commerce's EBITA margin was (13.1%). Local Services' EBITA margin was (3.5%), up from (13.6%) a year ago. Cloud's EBITA margin was 9.9%, up from 8.4% a year ago, on product mix shift to higher-margin public cloud products including AI products and improving operating efficiency. Cainiao EBITA margin was 0.8%, vs. 3.4% a year ago. Overall EBITA margin was 19.6%, down 0.9 pts y/y, with absolute EBITA up 4% y/y.
Estimate revisions. F4Q total revenue estimate largely unchanged, but increasing EBITDA by 7%, on 97bps higher margin. Decreasing FY26 revenue estimate by 1%, but increasing EBITDA by 13% with a 265bps higher margin.
Welcome to open a CBA today and enjoy access to a trading limit of up to SGD 20,000 with upcoming 0-commission, unlimited trading on SG, HK, and US stocks, as well as ETFs. Find out more here.
Other helpful links:
Comments