Alibaba (BABA) Update

Alibaba reported what we would call the greatest earnings “miss” of all time last week, with top-line revenues of $34.57B (+2% YoY), falling $910 million short and adjusted EPS of $2.06 coming in $0.10 less than expected.

However, to call this quarter a “miss” is extremely misleading.

Top-line revenue estimates didn’t fully account for the $1.7B sale of supermarket Sun Art and ~$1B sale of department store Intime, two perpetual loss-generating brick-and-mortar businesses that were offloaded but included in last year’s quarterly numbers. Excluding those, Alibaba delivered 10% revenue growth for the quarter, the fastest growth in two years.

Looking at the bottom line, increased investment in Instant Commerce continued to pressure margins, down 14% YoY, as management maintained its pledge of $7B in subsidies and investments. Excluding those Instant Commerce investments, China E-commerce and overall EBITA both expanded YoY.

So for those worried about the headline numbers miss, may we offer you the world’s smallest violin.

In reality, we viewed this quarter as a validation of our core thesis, which has always been that Alibaba is 1) a proxy for Chinese AI, and 2) the toll taker of the middle-class recovery and pivot toward consumption. Both growth engines were on full display.

Cloud revenue accelerated to its fastest clip in over three years, up 26% YoY to $4.66 billion, with all signs pointing to +30% growth on the horizon and continued expansion on top of Alibaba’s ~40% leading market share. At the same time, AI-related product revenue posted triple-digit growth for the eighth straight quarter.

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China E-commerce accelerated to 10% top-line growth to $19.55 billion, with customer management revenues expected to continue accelerating on their double-digit clip and 88VIP members posting double-digit growth to 53 million members. Meanwhile, Alibaba has already reached industry-leading scale and market share within four months of launching Taobao Instant Commerce, with monthly customers reaching 300 million and daily orders peaking at 120 million, all with the long-term expectation of delivering $140 billion in incremental e-commerce GMV annually within three years.

On top of that, Alibaba International (AIDC) posted 19% growth to $4.85 billion and a 98% YoY improvement in adjusted EBITA to a loss of just $8 million as the segment eyes its first-ever quarter of profitability expected in the next earnings report.

So while headlines fixate on the earnings miss, the reality of this quarter is that the growth engines we as long-term shareholders care about — AI, Cloud, E-commerce, and International — are all shooting the lights out. The best part about all of this is that despite what feels like a big move by doubling off the lows, we continue to believe the train has only just started to leave the station. These strengthening fundamentals are only in the early innings of re-accelerating, and as we like to say, you can only hold the beach ball under the water for so long. The game is on.

Meanwhile, all we continue to hear about is how the rally in Chinese equities is liquidity-driven and lacks strengthening fundamentals. While cash certainly does make bull markets, in the case of Alibaba, writing this rally off as lacking fundamentals is just flat-out wrong.

That’s not to say that the return of domestic flows isn’t a big deal. It certainly is. There are over $23 trillion of household bank deposits in mainland China sitting on the sidelines, ~$7 trillion of which is excess savings and considered above trend, beginning to pile into equity markets.

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Domestic flows have been a key catalyst and something that has been on our radar since Alibaba’s inclusion in Southbound Connect last year, a move that gave over 200 million mainland investors access to the Amazon of China for the first time, with analysts forecasting over $20 billion of potential inflows. Flows via the Southbound Stock Connect continue to show strength and room for further upside, with total ownership through the program at 8.68% of Alibaba’s shares outstanding, compared to ~11% for Tencent and 14.82% for Xiaomi.

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But really, this is only part of the story.

What’s not being talked about enough, and why we call this the most hated rally, is just how few global investors actually own it.

Coming into this year, positioning was near historical lows after 2024 marked not only the third straight year of net outflows from China, but also the highest ever recorded outflows of foreign direct investment. 

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Perhaps the most striking stat that highlights how ignored China, despite being the second-largest economy in the world, continues to be is the MSCI All Country World Index, which has 64.43% exposure to the US versus a mere 3.15% to China. The “uninvestable” narrative surrounding Chinese equities left many managers structurally underweight, even as valuations reached generational lows. We were happy to take the other side of that trade and have been pounding the table for years.

We may have been a little early, but so far that contrarian bet has well paid off. The Hang Seng has surged 27% year-to-date, more than 3.2x the S&P 500’s gain.

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Meanwhile, managers have missed nearly all of that rally, with global equity flows YTD still an outflow of nearly $11 billion. While we are just starting to see headlines of foreign flows returning in recent weeks, overall allocations have barely even come off the mat. Allocations remain at just 6.5%, in the 15th overall percentile, and well below the 15% we saw when China was all anybody wanted to talk about just a few years ago.

Even with this recent move in Alibaba, the stock still trades at just 17x earnings, with analysts now pricing in 31.2% earnings growth for next year and 17.54% in the following year. Investors can’t find that sort of value in any country not called China, and the fact of the matter is that money eventually finds its way to where it is treated best. Managers can only ignore clear value for so long until it hits them over the head.

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That’s why we expect the next leg of the rally will likely be fueled by foreign capital capitulating into a market they spent years avoiding, and on the backs of underweight managers trying to keep their jobs. The “uninvestable” narrative has already been proven wrong, and every day that prices climb higher, the cost of staying underweight grows.

And as we say, the cherry on top will be the long-awaited Trump Xi handshake, which will serve as a green light not just for a return of foreign flows, but in our view the start of Chinese equity euphoria. When everyone finally embraces the trade we’ve been building for years, that is when we will rotate out, searching for the next un-investable opportunity.

Until then, here’s everything you need to know about Alibaba’s Q1 earnings:

Q1 Earnings Breakdown

10 Key Points

1) The Cloud segment posted its fastest growth in over three years, accelerating 26% YoY to $4.66 billion, while adjusted EBITA also rose 26% to $412 million (8.8% margin). Management expects continued acceleration over the next few quarters, with all signs pointing to +30% top-line growth as Alibaba extends its lead as China’s #1 cloud infrastructure provider, holding and expanding ~40% market share.

2) AI-related product revenue posted triple-digit growth for the eighth straight quarter, now making up more than 20% of the Cloud segment’s external revenue. This proves that growth is not simply due to a small base and that BABA’s AI investments are delivering tangible results. Its upgraded Qwen models remain among the world’s top-performing large language models and continue to gain traction overseas. Reports also suggest Alibaba is working on a new AI chip to rival NVIDIA’s lineup, potentially outperforming the H20, further strengthening its position as China’s top full-stack AI and Cloud leader.

3) Alibaba’s newly organized China E-commerce group, which includes Taobao, Tmall, Ele.me, and Fliggy, reported 10% YoY revenue growth to $19.55 billion. Adjusted EBITA fell 21% YoY to $5.36 billion as heavier investments in instant commerce weighed on near-term profitability, though excluding these investments profitability would have improved YoY. Management is already seeing strong synergies from instant commerce, with Taobao app monthly active users rising 25% and daily orders hitting record levels. Customer management revenue increased 10%, supported by last year’s 0.60% software service fee and stronger advertising demand as traffic expanded. CMR growth is expected to sustain double-digit increases in the coming quarters. Another key driver was continued double-digit growth in 88VIP memberships, Alibaba’s highest-spending customers and its equivalent of Amazon Prime, now exceeding 53 million members.

4) Taobao Instant Commerce, launched at the end of April, drove a 12% YoY increase in quick commerce revenue to ~$2 billion. Alibaba now serves 300 million monthly customers, up 200% from pre-launch levels, with daily orders peaking at 120 million, averaging ~80 million, and active riders increasing to 2 million. Scale was the company’s first goal and results have already exceeded management’s expectations, as Alibaba now leads in both food delivery-to-home orders and merchant supply. The next step is efficiency, with management aiming to reduce unit economic losses by half over the next two months while holding ~80 million daily orders, with the long-term goal of achieving industry-leading margins. Most importantly, Instant Commerce is expected to deliver CNY 1 trillion ($140 billion) in incremental GMV annually within three years, representing an ~11% increase in traditional e-commerce GMV.

5) Alibaba International (AIDC) delivered 19% YoY revenue growth, reaching $4.85 billion. Management’s top priority remains improving operating efficiency, resulting in a 98% YoY improvement in adjusted EBITA to a loss of just $8 million, all while sustaining strong growth. Management believes profitability will continue to improve, with all signs pointing to AIDC reporting its first-ever profitable quarter in the upcoming earnings report, as the company works toward profitability at scale for one of its largest business segments.

6) As expected, free cash flow was an outflow of $2.63 billion as management continues its plans to invest $53 billion over the next three years in AI and Cloud infrastructure and $7 billion in instant commerce, driving quarterly capex to more than 3x last year’s level.

7) Management repurchased 7 million ADSs during the quarter for $815 million, at an average price of ~$116. Buyback dry powder remains significant at $19.3 billion. While this reflects a material slowdown, unlike many Western companies that often erode shareholder value, Alibaba’s management actually considers share price when executing repurchases. As long-term shareholders, this is exactly what we want to see.

8) Alibaba ended the quarter with cash and other liquid investments of $81.76 billion and a net cash position just under $50 billion, representing ~15% of its current market cap. This strong net cash position serves as a backstop and gives us all the confidence we need as management ramps up capex over the next few years.

9) Total stock-based compensation, which Alibaba used to hand out like candy, totaled just $495 million during the quarter, down 14% YoY. Management has shifted toward a higher proportion of long-term cash incentives, a change we have long preferred.

10) Revenue from other segments fell 28% YoY, primarily reflecting the sale of Sun Art and Intime included in last year’s results. Freshippo, Alibaba Health, and Amap all posted revenue gains and improved operating results, with management targeting breakeven for these loss-making segments within 1–2 years.

Morningstar Analyst Note

Earnings Call Highlights

Disney (DIS) Update

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Q3 Earnings Breakdown

10 Key Points

1) Revenue came in at $23.65 billion, up 2% YoY and just shy of the $23.69 billion consensus. Adjusted EPS crushed expectations at $1.61, well above the $1.45 estimate and up 16% YoY.

2) Direct-to-Consumer delivered another strong quarter, with revenue rising 6% YoY to $6.18 billion. Adjusting for the prior-year inclusion of Disney+ Hotstar, streaming revenue would have grown +9%. Most importantly, profitability continues to improve, with operating income reaching $346 million (5.6% EBIT margin), compared to a $19 million loss last year. This strength led management to raise its full-year operating income target for the segment to $1.3 billion from $1 billion, implying at least $325 million in Q4 operating income. The long-term goal remains achieving double-digit DTC margins, with further upside expected once that milestone is reached.

3) Domestic Parks, Disney’s bread-and-butter business and the company’s largest EBIT contributor (~36% of total), continues to shine. The segment delivered $6.4 billion in revenue (+10% YoY) and $1.7 billion in operating income (+22% YoY). Despite concerns over increased competition following the opening of Epic Universe in May, Walt Disney World just posted its largest Q3 revenues ever. Per-capita spending rose +8% YoY, the highest growth rate in over two years, supported by strong attendance. Management raised full-year Experiences operating income growth guidance to 8%, the high end of the prior range, positioning the business to exit the year at record-high EBIT growth levels.

4) Disney delivered strong results across its film slate, with Lilo & Stitch surpassing $1 billion at the global box office, marking Disney’s fourth billion-dollar film in just over a year. The film is now the second-largest merchandise franchise this year, behind only Mickey Mouse, with merchandise revenue up more than 70% YoY and a sequel already in development. Management remains confident in the upcoming slate for late 2025 and 2026, which includes Zootopia 2, Avatar: Fire and Ash, Star Wars: The Mandalorian and Grogu, Toy Story 5, a live-action Moana, and Avengers: Doomsday. Disney is back to doing what it does best: creating blockbuster hits.

5) Disney’s Cruise division continues to perform exceptionally well, with the recent launch of Disney Treasure off to a strong start. Two additional ships are set to debut this year, expanding the fleet to eight. Occupancy rates and forward bookings remain strong, with 2026 already more than halfway booked and newer ships performing even better. This high-margin segment remains a key driver of management’s multi-year double-digit earnings growth outlook through 2027.

6) Management continues to execute on its turbocharged investment in Experiences, with $30 billion committed to domestic parks and the largest wave of global expansions in Disney’s history. Year-to-date capex has climbed to $6.1 billion, up from $3.9 billion at this point last year. Most importantly, returns on invested capital for the segment remain highly attractive and reached record highs as of Q2.

7) Year-to-date free cash flow stands at $7.52 billion, up nearly $3 billion from the same time last year, pushing trailing twelve-month free cash flow to a record $11.55 billion. Operating cash flow has reached $13.63 billion year-to-date, with management reiterating full-year guidance of $17 billion, raised from the initial $15 billion at the start of the year. Looking ahead, management expects to see positive cash tax benefits from the One Big Beautiful Bill, providing another boost to cash flow heading into 2026.

8) Disney officially launched its long-awaited direct-to-consumer ESPN offering, giving fans direct access to ESPN’s full suite of networks and services for the first time. Alongside the launch, management announced a non-binding agreement with the NFL to acquire NFL Network and other media assets in exchange for a 10% equity stake in ESPN. CEO Bob Iger called the deal “one of the most important steps ESPN has taken since 1987.” The transaction is expected to close by the end of next calendar year and is projected to be $0.05 accretive (before purchase accounting) in its first full year post-close.

9) Management once again raised full-year guidance, now expecting adjusted EPS of $5.85 for the full year, above the prior $5.75 and consensus of $5.77. This reflects 18% YoY earnings growth, effectively doubling management’s initial full-year outlook of high single-digit growth. Most importantly, the company’s three-year target of sustaining double-digit earnings growth through 2027 remains firmly intact.

10) Subscriber growth remained solid, with total Disney+ and Hulu subscriptions reaching 183 million, up 2.6 million sequentially. Looking ahead to Q4, management expects over 10 million net subscriber additions, driven primarily by Hulu following the expanded Charter distribution deal.

Earnings Call Q&A Highlights

General Market

The CNN “Fear and Greed Index” ticked up to 60 this week from 59 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked down to 92.94% this week from 98.15% equity exposure last week.

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