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Alibaba (BABA -6%) missed earnings expectations for the second consecutive quarter in Q4 (Mar) despite aggressive repurchases and accelerating revenue growth, sparking profit-taking today. Shares of the China-based e-commerce and cloud computing giant received a favorable push yesterday following reports of the company carving out a leadership position in AI, particularly within the public sector. Yesterday's gap higher extended BABA's recent run to over +20% since tagging 2024 lows in April. It also incorporated relatively higher expectations in front of BABA's Q4 report, causing today's rapid pullback.

• What led to the earnings miss? Within BABA's domestic e-commerce business, which comprises Taobao and Tmall, customer management revenue (CMR) growth edged just 5% higher yr/yr, trailing gross merchandise volume (GMV), which jumped by double-digits. CMR is comprised of marketing and other services BABA offers to merchants, which carry appealing margins. By lagging GMV growth, BABA's profitability suffered in Q4.
  • Part of why CMR is underperforming is that BABA is gradually rolling out its monetization products. As such, the new models offered to merchants carry low monetization. Management is confident it will see CMR growth catch up with GMV eventually. However, for the next few quarters, it will lag.
• Meanwhile, BABA has been heavily investing in making its e-commerce offerings more competitive, particularly overseas, where rival Pinduoduo (PDD) has done a tremendous job marketing Temu in certain Western markets. BABA continued to enhance AE Choice, its answer to Temu. Management noted that while an increasing proportion of orders from AliExpress switch over to AE Choice, it will take time for profit margins to catch up, creating a margin gap.
• It also did not help that BABA's Cloud Intelligence Group continues to endure weak revenue growth, climbing just 3% yr/yr in Q4, matching Q3's (Dec) growth rate, and inching just 1 pt higher from the +2% posted in Q2 (Sep). After halting its Cloud IPO ambitions late last year, BABA is increasing high-quality revs from public cloud adoption while reducing its exposure to low-margin project-based contracts.
  • During Q4, BABA's core public cloud offerings generated double-digit revenue growth, illustrating how moving to this market should significantly boost Cloud Intelligence Group's revs down the road.
• While AI enjoyed robust demand in Q4, delivering triple-digit revenue growth yr/yr, it did not materially lift overall revenue. Still, BABA is observing a rapid increase in customer demand for AI, stimulating growth for traditional cloud computing needs and prompting BABA to actively invest in its cloud computing product suite, particularly in AI infrastructure.
• Looking ahead, BABA anticipates its Taobao and Tmall GMV will gradually return to more healthy growth in FY25. In overseas e-commerce, BABA remarked that its ongoing focus on investing will produce long-term demand. Lastly, BABA is confident that cloud revenue will return to double-digit growth during the back half of FY25.

BABA's constant investments and spending ate into its profitability in Q4. For a company that has had numerous setbacks, internal and external, investors are not quick to shrug off quarterly blemishes. As such, BABA remains a "show me" stock and could trade sideways until profitability improves and revenue growth reaccelerates.