Why did Alibaba’s stock “open high and fall” after its earnings report? Goldman Sachs: AI and cloud business exceeded expectations, but comments about “short-term volatility” during the conference call increased concerns about e-commerce.

Why did Alibaba’s stock “open high and fall” after its earnings report? Goldman Sachs: AI and cloud business exceeded expectations, but comments about “short-term volatility” during the conference call increased concerns about e-commerce.

November 25th, Alibaba released its latest financial report, delivering better-than-expected results in cloud business growth and AI capital expenditure, which once pushed its stock price up 4% in U.S. pre-market trading. However, market optimism did not last. After the earnings call, the stock price reversed and ultimately closed down by more than 2%. According to Chasewind Trading Desk, Goldman Sachs analyzed in its latest report that Alibaba’s “high-open, low-close” stock performance was mainly due to growing investor concerns about its e-commerce business. The report reads: We believe the negative stock reaction was due to: the AI+cloud segment’s better-than-expected performance reinforced the AI-driven narrative and valuation re-rating seen this year; however, investor worries about the e-commerce business increased, as management commented on the earnings call that, due to fiercer competition and user investments, Customer Management Revenue (CMR) growth may slow, and the EBITA (earnings before interest and taxes) of China’s e-commerce business may experience quarterly fluctuations. A Wallstreetcn article noted that on the earnings call, Alibaba CFO Toby Xu stated, “You can expect customer management revenue and profits to show short-term volatility.” Regarding customer management revenue in the e-commerce business, the base effect from payment transaction fees and site-wide promotion will have an impact. We started charging payment transaction fees in September last year, so beginning next quarter, due to this base effect, the growth rate is expected to slow. But as we have always emphasized, our primary goal is to ensure mid- and long-term market share. In this process, we will continue to invest decisively in consumers and merchants and push forward with upgrades to our e-commerce platform’s business model. Therefore, in this process, we can expect customer management revenue and profits to show short-term volatility. Goldman Sachs believes this statement was key to the negative market reaction. The analysis points out, behind market concerns are “fiercer e-commerce competition and user reinvestment,” along with the high base effect from software service fees last year. AI Narrative Reinforced: 380 Billion RMB CapEx Target “May Be Too Low”, Cloud Business Outlook Optimistic In stark contrast to worries about its e-commerce division, Alibaba’s AI and cloud business emerged as the highlight of this earnings release. During the reporting period, Alibaba Cloud business revenue grew 34% year-on-year, exceeding Goldman Sachs’ estimate of 31%. Among this, AI-related revenue now accounts for 20% of external customer income, marking the ninth consecutive quarter of triple-digit growth. Goldman Sachs especially noted Alibaba’s aggressive stance on capital expenditure (CapEx), further strengthening its commitment to the AI strategy. The report shows Alibaba’s quarterly capital expenditure surged 80% year-on-year to 32 billion RMB, while rival Tencent’s CapEx declined year-on-year for the same period. Goldman attributed Alibaba’s “more aggressive CapEx plan” to its “AI infrastructure capabilities and full-stack AI products,” and sees this as similar to Google’s proprietary TPU full-stack capabilities. Alibaba management even commented on the call that the previously announced three-year, 380 billion RMB investment target “may be too low,” hinting at further investment in the future. Based on strong AI demand, Goldman Sachs remains optimistic about Alibaba Cloud’s future growth, projecting year-on-year growth rates of 38% and 37% for the December and next March quarters respectively. Goldman Sachs Maintains Buy Rating, Expects Company’s AI Business to Retain Leadership Position, Instant Retail Losses to Narrow Taking all factors into consideration, Goldman Sachs adjusted its valuation on Alibaba. The report says that due to lowering the valuation of the China e-commerce business, Goldman decided to cut Alibaba’s 12-month SOTP (sum of the parts) target price from $205/199 HKD to $197/192 HKD. Despite the target price downgrade, Goldman Sachs still maintains its “buy” rating for Alibaba, stating that the company’s cloud business valuation remains unchanged and that “the AI-driven storyline is still intact.” Goldman Sachs assumes in its baseline scenario that “Alibaba’s AI+cloud business will continue to lead in China, while the base profits of its Chinese e-commerce unit will stabilize, and losses in the instant retail business will narrow over the coming quarters.” Analysts stated the market may be underestimating the potential of Alibaba’s international cloud business and the “globalization” valuation that comes with it. ~~~~~~~~~~~~~~~~~~~~~~~~ The above highlights are from Chasewind Trading Desk. 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