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Alibaba (BABA): 4Q21 Result, Not as Bad as It Looks

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Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

After <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> reported FY2021 results, the stock took a 6% slide in a market that was already skittish and looking for an excuse to jump off the global tech names and even more so for the Chinese platforms because of the continuing regulatory concerns. In this environment, it is easy to lose conviction on a stock.  However, I offer three reasons why investors should not be discouraged about BABA and its perceived weak results:<ol>
<li>
Operating profit did NOT decline.  Excluding the AML penalty of CNY18.2 bn, operating profit in the March quarter would have grown 48% YoY, and 18% on a full-year basis.</li>
<li>
Revenue growths remain brisk at 64% for the quarter and 41% for the full year, beating consensus expectations.  Excluding Sun Art consolidation, it would still be a robust 39% and 32%, respectively.  Customer management revenue growth of 40% YoY in the March quarter was promising. </li>
<li>
Cloud profitability on the rise.  After breaking even in the Dec quarter, the segment EBITA margin rose to 1.8% -- still small but fast improving.       </li>
</ol>Keep in mind that Alibaba is out of the crosshair of regulators, while its competitors are only beginning to feel the heat. I believe the company is in a good position to leverage its gigantic free cash flow and the uncertainty facing its competitors to gain market share.   I estimate Alibaba’s operating profit to grow 61% in FY2022.   Key risk: Management stated that it would reallocate incremental profits into generating incremental revenue growth. Alibaba management always states that it does not manage by margins.  However, the company has always maintained its marketplace EBITA margins above 70% (of marketplace revenues, not total revenues).  I believe margins will continue to trend down,  largely because of the faster than expected revenue growth, but its profit growth will remain robust.    Previous related reports: <a href="https://www.smartkarma.com/insights/china-e-commerce-robust-consumption-data-hints-at-online-spending-spree" target="_blank" data-smartkarma-citation="insights:50798" rel="noopener">China E-Commerce: Robust Consumption Data Hints at Online Spending Spree</a><a href="https://www.smartkarma.com/insights/alibaba-baba-us-record-fine-grin-and-bear-it-as-better-days-are-ahead" target="_blank" data-smartkarma-citation="insights:50219" rel="noopener">Alibaba (BABA US): Record Fine - Grin and Bear It as Better Days Are Ahead</a> <a href="https://www.smartkarma.com/insights/alibaba-baba-us-ant-group-woes-overly-priced-in" target="_blank" data-smartkarma-citation="insights:48648" rel="noopener">Alibaba (BABA US): Ant Group Woes Overly Priced-In</a>

After Alibaba Group (BABA US) reported FY2021 results, the stock took a 6% slide in a market that was already skittish and looking for an excuse to jump off the global tech names and even more so for the Chinese platforms because of the continuing regulatory concerns. In this environment, it is easy to lose conviction on a stock.  However, I offer three reasons why investors should not be discouraged about BABA and its perceived weak results:

Operating profit did NOT decline.  Excluding the AML penalty of CNY18.2 bn, operating profit in the March quarter would have grown 48% YoY, and 18% on a full-year basis.

Revenue growths remain brisk at 64% for the quarter and 41% for the full year, beating consensus expectations.  Excluding Sun Art consolidation, it would still be a robust 39% and 32%, respectively.  Customer management revenue growth of 40% YoY in the March quarter was promising. 

Cloud profitability on the rise.  After breaking even in the Dec quarter, the segment EBITA margin rose to 1.8% -- still small but fast improving.       
Keep in mind that Alibaba is out of the crosshair of regulators, while its competitors are only beginning to feel the heat. I believe the company is in a good position to leverage its gigantic free cash flow and the uncertainty facing its competitors to gain market share.   I estimate Alibaba’s operating profit to grow 61% in FY2022.   Key risk: Management stated that it would reallocate incremental profits into generating incremental revenue growth. Alibaba management always states that it does not manage by margins.  However, the company has always maintained its marketplace EBITA margins above 70% (of marketplace revenues, not total revenues).  I believe margins will continue to trend down,  largely because of the faster than expected revenue growth, but its profit growth will remain robust.    Previous related reports: China E-Commerce: Robust Consumption Data Hints at Online Spending SpreeAlibaba (BABA US): Record Fine - Grin and Bear It as Better Days Are Ahead Alibaba (BABA US): Ant Group Woes Overly Priced-In 

アリババ（BABA US）：投資家が心配する必要がない3つの理由