Thread by @kevg1412

1/ 3Q21 $BABA earnings were released this morning. The stock is down 11% today, bringing total losses to -36% YTD.

This quarter could be thesis changing and potentially evidence that the bears were right with their concerns. A short thread below.

2/ Aggregate revenue excluding their Sun Art (1P retailer) acquisition is +16% y/y vs +22% y/y last Q. There are many pieces to BABA, but we will split it up into 4: China core commerce, China non-core commerce, international, and cloud.

3/ Right off the bat we can say cloud looked fine, +33% y/y, reaccelerating 300bps sequentially as the (assumed) Bytedance contract rolls off. Their international businesses looked okay with BABA adding 20mn international buyers to 285mn and...

4/ international (consumer + wholesale) revenues were +34% y/y vs. +49% y/y last Q. Specifically, they call out Lazada orders +82%, in the same vicinity of last Q’s +90%.While growth has been solid, it will not be clear for sometime whether it is value accretive.

5/ However, Cloud and International are only 10% and 7% of revenues, respectively, and a trivial % of profits. ~75% of revenues and virtually all of profits are still Chinese commerce and that is where we will focus.

6/ We are simplifying, but there are two pieces to China commerce: (1) the core platform businesses like Taobao and Tmall, and (2) everything else which includes consumer local services (ele.me, koubei, fliggy), Cainiao (logistics), New Retail (1P stores), etc.

7/ The most concerning number in this earnings release is 3%, which is how much customer management revenues (CMR) grew y/y. This figure was 14% last Q.

(CMR is how much BABA makes from advertising and commissions from Taobao and Tmall.)

8/ Our concern stems not from the absolute rate of this growth as BABA trades at a far cheap enough price that you do not need much, if any, growth in their core China commerce business to rationalize an investment. (Plenty of growth from other segments.)

9/ The issue is that CMR grew less than GMV with competition and a “merchant support program” as prime attributes. Now this is not a market share concern, but rather a concern that BABA is over-earning on their current ecomm. transactions.

10/ As said on the call, revenues grew slower than GMV because they had to essentially rebate money back to merchants. The concern is that this isn’t a one-time business incentive, but rather indicative of BABA over-earning in this new competitive landscape.

11/ In hindsight, perhaps the “2 choose 1” policy which was recently deemed illegal, was benefiting BABA more than we appreciated. When merchants had more choice to go elsewhere, they did. And now BABA is paying up to get them to stay.

12/ In response to this weakness, mgmt acknowledges competition is picking up and notes that they are having to invest more. Then mgmt points to their local services segment as a competitive strength… make no mistake, this would be a thesis shift.

13/ To be fair, BABA is still a majority of the ecomm. market and there were legitimate macro headwinds that were adversely affecting them. Their single digit GMV growth (call it 5%) on their huge ~$1.1tn GMV base is still ~$14bn of y/y growth on tough priors and competition.

14/ We can compare this with $JD, who also just reported 3Q. Product sales grew +23% y/y or +$5.5bn y/y. If we assume GMV is split ~evenly between 1P and 3P, then total GMV increase was likely less than BABA’s. (Not a negative on JD, just giving perspective on BABA’s scale).

15/ There’s another factor worth considering. Readers of our original $BABA report will recall that BABA primarily monetizes ecommerce through their ad network, Alimama.

Tencent on their call noted that eCPMs have been soft given macro headwinds and certain regulation.

16/ It is possible there were knock off effects of this that weighed on advertising pricing (and thus CMR), but we would need more merchant info before believing this “conspiracy” theory.

17/ To the positive, Chinese active annual customers reached 953mn, +41mn q/q. This was led in part by new initiatives with Taobao deals and Taocaicai which drove annual buyers to 240mn, +60mn q/q. However, this increased investment crushed margins.

18/ Commerce margins were 16.4% (not backing out SBC) vs. 23.2% in 2Q and 25.5% in 3Q20. They call out ~$2bn of strategic investments and losses that are weighing down the margin, which backing out would bring margins to 23.8%.

19/ However, how much of this is indeed “one-time” and well-spent is unknown. We will give them credit that some of those losses, especially with their international operations like Lazada, are totally unrelated to the core value prop of Taobao/Tmall…

20/ But it is unclear how much of these expenses are to just maintain their platform activity against increased competition versus actually grow. Coupled with weakness in CMR (where they are also effectively subsidizing activity), is uncomforting.

21/ We have not abandoned our general thinking that Alibaba’s competitive position is understated and the valuation already implies something is terminally wrong with the business, but this does make us question our assumptions.

22/ At a ~$400bn market cap today, they trade at an annualized FCF yield of ~3.5% without any adjustments for their outsized investments, many loss pools, ~$60bn in cash, and investment portfolio. Alibaba is still one of China’s leading tech companies….

23/ but of course that can change. Tech leaders have gone out of favor before. If it is in fact a deteriorating business, it can be cheap for a long time… until it’s not. Time is the friend of a great business and the enemy of a poor one. The whole way down it could look cheap.

24/ It would be a mistake to over extrapolate one quarter's performance, but we consider our opinion on BABA in review. In the quarters to come, we will be looking for evidence their “strategic” investments were indeed value accretive instead of necessary subsidy...

25/ and whether they can keep merchants without subsidizing them. The stock might be down 10%, but cheap isn’t an investment thesis.

26/ To learn more about BABA’s many underlying businesses, see our original 24,000 word, members-only deep dive.

djyresearch.com/2021/06/24/ali…

End/ You can see our original tweetstorm here:

https://twitter.com/kevg1412/status/1410658887817039876