Can Alibaba Sustain the Earnings Boost?

Key Points

• Alibaba posts $2.24 diluted EPS, beating expectations by close to 20% on the back of cost cuts and Cainiao segment growth of 27% year over year. 
• More efficient use of subsidies and M&A synergies boosted operating margins by 11.2% from a year earlier, can they keep up this synergistic efficiency?
• Southeast Asia acquisitions of E-commerce, logistics, and consulting services through Lazada subsidiary expected to significantly boost operating margins and bottom line profits ahead of schedule.
• Cloud business segment points to rainy weather ahead; however, data from its public cloud and data center openings may tell a different story.

Alibaba Group NYSE: BABA rose in pre-market trading in New York; its shares increased by more than 6%. The online retailer considerably surpassed the average expectation of 35 billion yuan by reporting net profits of 46.8 billion yuan ($6.8 billion). Just above expectations, revenue increased 2.1% to 247.76 billion yuan in the December quarter. All told, diluted earnings per share beat expectations by roughly 20% coming in at $2.24. 

Most investors may think of Alibaba as a simple online retailer that mostly beats prices and delivers in bulk, however there are many segments that markets tend to miss out on when calculating just how much potential this firm can have in the future. One such segment has quietly been making headways into expanding Alibaba's presence and profits in key Chinese verticals, Cainiao.

Cainiao business pushing ahead

Alibaba ended 2022 cutting 19,000 jobs due to its first-ever revenue contraction from COVID-19-related supply chain, logistics, demand and expansion issues. However, the earnings boost did not only come from reduced overhead, it could not be further from the truth as investors can find in the latest quarterly results presentation figures.

As savvy investors may know, Alibaba has been aggressively expanding its verticals through M&A plans which accrue to synergistic revenue growth and cost savings. More than job-cutting, the firm has achieved an approximate 11.2% operating margin boost year over year on the back of such synergies in the middle line. 

All told, there is still one stealthy business segment that has successfully made a name for itself since being founded back in 2013. 

Cainiao - which translates to "rookie" or "novice" - is a major logistics player in China who has been disrupting the old and tested methods of commerce and transportation of goods. As the nation opens back up from lockdown policies and harsh pandemic effects, local businesses and consumers have pushed up revenue for this segment in the tune of 27% year over year.

Domestic consumer logistics services revenues grew as a result of a new service model upgrade in 2021 where Cainiao looked to take on more responsibility in the commerce and logistics process, thus automating and delivering more value to its customers. This value proposition has also been reflected through the adoption of international fulfillment centers choosing Cainiao as their advisor. 

Expansion and adoption of Cainiao can be further detailed in the quarterly results press release, where management pointed to the commencement of new operations in five new international sorting centers. They are also looking to expand and improve their China commerce customers for this business, reaching a daily peak of doorstep deliveries for 18 million users. 

Margins boost sustainability?

Anyone familiar with the buyout concept made famous by Private Equity firms knows that the miracle of "synergies" usually take time. Alibaba has accumulated a large queue of revenue and cost synergies over the years by aggressively funding their "high-quality growth" initiative in its M&A activities. 

Some acquisitions like Trendyol and Lazada have returned some extra dollars to the mothership. Trendyol has become the largest E-commerce platform in Turkey in terms of volume and gross market value. Trendyol played a key role in providing logistics help during the recent earthquakes in Turkey, placing Alibaba in a shinier light in the eyes of the world by providing value. This business in Turkey also experienced 26% revenue growth year over year.

Lazada is a whole different animal, operating in Southeast Asia with access to some of the fastest-growing consumer markets in the world, this segment has improved its monetization rate year over year by making its operations and value proposition more efficient and desirable for consumers. 

Both of these businesses have posted losses; however, their rapid path to profitability seems to be in the cards for the next 1-3 years, which seem to be ahead of schedule and analyst expectations reflected in EPS projections. The overall effect on Alibaba's margins has been underplayed lately, and only time can tell how much these margins can expand from such synergies. 

Another important business segment to remember for the near future is its cloud services and data centers. Although revenue was relatively flat year over year for this business, growing service demands worldwide have allowed for Alibaba to ramp up its international presence by opening a third data center in Japan, Saudi Arabia, Germany, Thailand and South Korea. Effectively Alibaba has access to consumer and business data from the fastest-growing regions in the world, with insights into cash cow businesses within said economies. 

Buying range?

Technically speaking, the stock is trading below its 78% weekly Fibonacci retracement level and enjoying major bullish divergence patterns on RSI, MoneyFlowIndex and Stochastic studies. 

Analyst consensus places a 51% upside on the stock with a median price target of $144.80. However, considering a scenario where these synergies become beneficial ahead of schedule and Chinese consumers fully recover from boosting all other segments, analysts place a high range for this stock at $180 per share.