Once a bedrock of China's technology industry, Alibaba (BABA 0.59%) has faced a series of setbacks over the past few years, including a massive slowdown in growth and a crackdown by the Chinese government.
Alibaba recently reported a solid quarter, with revenue improving by 14% year over year, the best performance since the September 2021 quarter. While it's still early days, there are signs that Alibaba is progressing well with its turnaround plan to get the company back into its positive trajectory.
Let's look at a few of those indicators.
Image source: Getty Images.
Its China e-commerce business is picking up
Alibaba is a massive tech conglomerate with a business spanning extensive areas, including e-commerce, logistics, fintech, entertainment, and cloud computing.
But despite operating such a diverse empire, the company depends enormously on its Chinese e-commerce business. To put it into perspective, this business segment accounted for 67% of Alibaba's revenue and all of its profits for the fiscal year ended March 31, 2023. And herein lies the problem -- this business unit posted a 1% fall in revenue in the last fiscal year.
So, any turnaround must start with the e-commerce segment returning to solid footing. And that's precisely what the company has begun to demonstrate in its latest results, with e-commerce revenue growing 12% year over year and adjusted earnings before interest, tax, and amortization (EBITA) improving 9%.
Alibaba also delivered some notable improvements across some critical operational metrics. For instance, its flagship Taobao app grew average daily active users by 6.5% year over year for June, thanks to effective user acquisition and better retention. Its VIP customers grew their spending by double-digits, indicating strong customer loyalty.
Overall, this latest earnings result is a breath of fresh air for the company after disappointing performances in the prior quarters. This result offers some early evidence that the e-commerce top dog remains in the e-commerce race in China.
Other business units also saw solid improvements
Alibaba has been a victim of its own success. Thanks to its sprawling business empire, the group became too big and complex for a single management team to handle, leading to subpar performance in recent years.
To correct the problem, Alibaba broke its empire into six units to bring back the entrepreneurial spirit to its business. The idea was that each business unit would have its independent board and management team, resulting in faster decision-making, quicker responses to market changes, and better incentive schemes.
While it is still early days, there are indicators that such a move is bearing fruit, as almost all business units have delivered solid improvements lately. For example, with the exception of the Cloud Intelligence Group, all other business units reported solid double-digit revenue growth in the latest quarter. Four of them even reported revenue growth of over 30%.
In addition, all six business units reported solid improvement in their profitability. In particular, Cainiao Smart Logistic and Digital Media and Entertainment Group went from loss-making last year to profitability this quarter. Combined, Alibaba reported a solid 32% improvement in adjusted EBITA.
A quarter of good performance is not enough to conclude that the worst is over for the company. Still, these early green shoots provide some optimism that Alibaba is heading in the right direction. And hopefully investors see more of this in the coming quarters.
What it means for investors
Over the last two years, Alibaba has struggled to sustain its historical trajectory of high double-digit growth rates. The recent earnings announcement shows some early signs of a turnaround, with growth coming back for the Chinese e-commerce business and some solid numbers delivered across other segments.
While I am optimistic that Alibaba is on track to deliver on its turnaround plan, it is probably too early to declare it victorious. Investors must see that the company can sustain this positive trend in the coming year. All eyes are on the next few quarters.
