Alibaba is in the eye of a geopolitical storm: Analyst

Shares of Alibaba (BABA) are slipping after the company posted an 86% loss in its fourth quarter profits year-over-year. CFRA Research Senior Equity Analyst Angelo Zino joins Market Domination Overtime to discuss Alibaba's earnings and what it may signal about the state of the consumer.

Alibaba saw weaknesses in its e-commerce and cloud businesses, which make up more than 50% of its revenue, Zino says. He adds that slow e-commerce growth is "disappointing," while the hit to the cloud business is concerning as it "is a critical part of the valuation story."

"There are clearly geopolitical pressures out there," he adds, saying that Alibaba is "absolutely in the eye of the storm." He points to the company's inability to access advanced chips, which will delay efforts to create large language models that could drive revenue as its US counterparts march ahead.

Zino says Alibaba's weak earnings demonstrate "that the consumer is trading down." While the company is seeing improvement from Chinese consumers, Zino is unsure whether that momentum will be sustainable through the end of the year.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Melanie Riehl

Video transcript

Shares of Alibaba.

Well in the red today after the company post an 86% loss in profit year over year for more on the latest quarterly results.

Let's get in here, Angelo Zino CFR, a research senior equity analyst, Angela.

It is always good to see you.

So uh let's just talk Alibaba there, Angelo because they report investors clearly disappointed that stock got hit today, finished down about 6%.

Give it, give us your reaction to the report Angelo, what did you make of it?

Yeah.

No, thanks for having me guys.

So, you know, as far as the results were concerned, I think, you know, part of the reason we sold off was we kind of ran into the numbers a little bit.

Um you know, over the last week or so, I'd also say um you know, definitely some disappointment as far as their e commerce business is concerned as well as their cloud business.

When you kind of look at those two businesses um over 50% of their revenue, that kind of being more their they're trying the ecommerce business.

So um you kind of look at what's going on in the ecommerce side of things in China continues to continue to see uh pricing pressure out there.

Um You are kind of, you know, seeing, you know, improvement in terms of kind of um you know, the the order volume there.

But that said um when you kind of look at the the the growth of that business segment only growing about 4% year over year.

So that continues to be, you know, disappointing in our view, the other side of things as far as the cloud business is concerned, that is a critical part of the valuation story, we think for Alibaba here, that has been a business uh that has disappointed here, investors over the last several quarters, you look at the growth rate here again, low single digit growth that has been the theme here over the last four or five quarters or so.

So really kind of they, they did highlighted an improving trajectory later this year, but that's that we're not seeing it in the results at this point in time.

And that continues, we think to, to, you know, disappoint a lot of investors out there.

Yeah.

And Angela, one of the things you highlighted in your note is that uh you know, you've got the Chinese government sort of hovering over the company.

What do you think that what risks specifically do you think they pose at that at this point?

Yeah, I mean, as as far as the the government can you know, whether it be the Chinese government or even the US government for that matter.

I mean, there, there are clearly geopolitical pressures out there uh to be honest with you.

And um I think the biggest risk is we just don't know, you know, what could potentially happen out there um from a geopolitical side of things, you know, what kind of initiatives can be announced um in the future.

But that said, um they are absolutely in the eye of the storm here.

Um When you kind of look at, you know, some of the pressures that they're facing, clearly, um their inability to kind of have access to, to certain advanced chips out there is definitely gonna hinder their ability to kind of create the large language models out there that could potentially generate significantly higher revenue or, or the type of capabilities that you see from um their US counterparts here.

Um So, you know, there are a number of issues out there.

Um you know, that they faced from a geopolitical perspective.

And um you know, one thing I would highlight here is the fact that they also did announce that they, they're going to kind of revisit the fact that they were gonna move their primary listing, I believe to Hong Kong.

Um you know, later this year.

And I think that's interesting because I think, you know, they're clearly concerns out there or were concerns out there back in, you know, 23 years ago about a potential delisting and implications that that could have to investors out there.

But um the fact that you are kind of, you know, shifting your primary listing out there also, I think kind of, you know, if something were to happen, um you know, from their US listing here, um you know, allows them to continue to have that um listing, you know, overseas Angela.

I'm just curious, you know, how good a read in your opinion is Alibaba on, on the Chinese consumer.

And, and if so, you know, what did this earnings report kind of tell us um about the health and resilience of that consumer right now?

Yeah, I mean, and, and I think you, you're getting, you know, counter, you know, different views from, you know, different companies out there.

But, you know, at the end of the day, you kind of look at um these results here.

I mean, it definitely tells you that the consumer is um trading down that has been kind of the um the story, at least on Alibaba side of things the last couple of quarters.

But that said again, I mean, the the the volume looks like it's improving when you kind of look at the t from a number of end markets out there, whether it's, you know, certain areas I cover kind of more on the tech side of things like smartphones.

Um You're definitely seeing kind of, you know, improving prospects on the China side of things now, whether or not that is sustainable, um as we go into the second half of the year and into 2025 remains to be seen.

But um as far as this quarter is concerned, you know, we've definitely seen some improvement from the China consumer out there, Angela, I wanna switch gears because today uh Google holding its IO conference, right, introducing some new A I powered search capabilities as well as Gemini capabilities.

Um And I know you cover alphabet as well.

So I'm just curious, you know what you thought of what they announced and whether alphabet is successfully making a case that it is going to be one of the big leaders in A I, I mean, we think so I I when you kind of look at at what they announced here, a lot of it very incremental in nature, I'd say kind of maybe that the biggest uh you know, news was maybe the fact that um they're going to start featuring A I overviews um by the end of this week um in the US.

And then, you know, in the coming months, you'll, you'll see it um on a global basis, but A I overviews essentially kind of A I powered summaries out there.

Um And you look to do a search out there.

So um they're throwing kind of more A I capabilities across their search business.

It's something, you know, they've clearly been in paid be mode here, um, over the last couple of months, they're now kind of, you know, go going full gear into it.

And, um, I think that's a, that's a good thing.

I think that kind of, you know, showcases them kind of, again, you know, looking to kind of get more A I enabled out there in a very sensitive area um in an area of their business that could potentially be disrupted over the next couple of years.

Um And then, you know, they also kind of announced a number of kind of, you know, model upgrades with um uh with Gemini and, and one, you know, 1.5 as well as flash.

So, um and then, you know, we, we also saw a number of improvements on the android side of things um that they could potentially launch here um as the year.

So um incremental improvements is how I would kind of look at what alphabet is doing here as far as A I is concerned.

But our view also is kind of what they're doing on the infrastructure side of things, what they announced that Google next last last month, um kind of shows really they are best in class on that side of things.

So we do like the incremental um improvements as well as their kind of best in class uh infrastructure out there.

I'm just curious, Angelo, you know, we, we also just heard from uh you know, Sam Altman and his team at open A I uh um, if and when open A I launches their own search product, Angelo, and that's been reported on, um, what kind of competitive risk do you think that poses to Google's bread and butter search business?

You know, it's, it's definitely a risk out there.

I mean, we, we did write a note about it yesterday and, you know, it, it's kind of wait and see and we kinda have to see exactly what they roll out with and, and how they roll it out.

Um I think it'll also be interesting to kind of see what Apple has to announce next month.

Um And whether or not, you know, they, they strike a partnership with open A I and how that kind of looks across their ecosystem.

But, um, you know, the way we look at it is alphabet continues to be that old to a consumer um, company out there.

And um, they are essentially the internet in many respects.

So, could they potentially see some disruption across their business model?

Could they potentially see some share loss?

Of course, they can.

Um, and in fact, we know we anticipate it to some extent, but in the same respect, they've also got a number of opportunities across other parts of their business specifically, you know, areas like the cloud.

So, um we do continue to like the story.

We do think they will continue to, you know, be fine on the, the search side of things with some share loss.

But that said, um you know, open A I is a formidable competitor out there.

And um it will be definitely interesting to kind of see what Apple has in store here um with partnerships that they announce, whether it be with, you know, Gemini on, on alphabet side of things or open A I. Um So wait and see, wait and see.

We got a lot of, a lot of big tech news coming Angelo.

Thank you so much for joining the show.

Appreciate it.