Alibaba reported the June quarter Thursday. Cloud grew 45%, adjusted EBITA margin got to 11.6%, management said both should keep going in that direction, and then the stock fell 8.6% on Friday.
I spent most of Friday and Saturday morning writing this with no idea why it sold off. Then Saturday afternoon word started going around that Alibaba is raising HK$80 billion, roughly $10.2 billion, through a share placement to fund the AI buildout. I don’t know if that leaked Friday. It would explain a lot if it did.
The dilution isn’t ideal, but the raise itself I’m fine with. I trust this management team more than I did a year ago, and given what cloud is doing I understand why they want to keep spending. Would’ve been nice to know before I added on Friday, but I probably would’ve bought anyway.
Quick background for anyone who hasn’t been following the name closely. Alibaba is still an enormous Chinese e-commerce business that barely grows, and for the past year it’s been eating the cost of an expensive instant-delivery fight with Meituan that wrecked group margins and did most of the damage to earnings. Those losses are coming down quickly now.
Cloud has been going the other direction the whole time. Nine straight quarters of acceleration, and this was the first one where the margin finally followed.
The quarter itself was good, and I liked the business more after reading the report than I did going in. Almost all of that is cloud, so that’s where I’ll start.
Cloud
AI Cloud and Compute Services revenue came in at RMB 48.4 billion, up 45%. Total segment revenue and external customer revenue both grew 45%.
That 45% was also pretty close to what analysts were already using. Alibaba does pre-earnings calls with the sell side, and the previews I saw in early July were around 45% growth with the segment margin moving from roughly 9% to 11%. Alibaba printed 45% and 11.6%. I thought it was a great quarter, but the headline numbers themselves were basically in line.
Still, this was the ninth straight quarter of acceleration, from a 3% decline in the March 2023 quarter to 45% growth now. Eddie Wu said it was the fastest cloud growth in 22 quarters, which takes you back to late 2020.
AI product revenue was RMB 12.4 billion, the 12th straight quarter of triple-digit growth. That annualizes to RMB 49.5 billion, or about $7.3 billion, and it is now 35% of external cloud revenue. A year ago it was a little over 20%.
Management thinks that annualized number will be close to $10 billion next quarter. It also said the model and application services business, including model-as-a-service, had crossed RMB 16 billion of ARR in August. There is some overlap in those figures, so I wouldn’t add them together. AI is 35% of external cloud revenue now and is moving the whole segment.
I’ve written about the revenue acceleration for long enough. The margin was the number I cared most about this quarter.