Why Alibaba Stock Dropped After Earnings

Shares of Alibaba Group Holding (BABA -5.61%), the Chinese e-commerce giant, tumbled 6% through 12:05 p.m. ET on Wednesday after reporting slight misses on both sales and earnings in its fiscal Q3 2023 financial report this morning.

Heading into earnings day, analysts had predicted Alibaba would earn $2.69 per American depositary share (each ADS represents eight common shares of stock on the Hong Kong market) on sales of $36.74 billion. As it turned out, though, earnings fell short at $2.67 per ADS, while sales came in just shy of expectations at $36.7 billion.

Alibaba Q3 sales and earnings

Are investors overreacting to a miss of just $0.02? A miss that — let’s face it — amounts to less than 1% of the money Alibaba was “supposed” to earn? Perhaps. But it’s worth observing that Alibaba’s earnings were also objectively terrible.

Despite sales growing 5% year over year, operating profit at the e-commerce giant declined 36%, while on the bottom line, net profit plummeted 77%. Granted, most of the company’s decline in profit was due to “mark to market” charges taken to account for the declining value of some of the company’s equity investments. But those were still losses — bad bets made by Alibaba in weak businesses, and opportunities to invest that money better that were lost by Alibaba.

As a result of these charges, Alibaba ended up earning only $0.80 per ADS for the quarter, generally accepted accounting principles (GAAP). (The “$2.67” profit, by the way, which is making the headlines today, was a non-GAAP number).

Is Alibaba stock a sell?

Of course, going forward, Alibaba’s goal is “to reignite the growth of our core businesses, e-commerce and cloud computing.” So how is that going?

Well, to be honest, it looks like things are off to a slow start. CEO Eddie Wu says his first step will be “revitalizing Taobao and Tmall Group and positioning it for future growth.” And yet sales in the e-commerce business actually underperformed overall sales growth for the company as a whole in Q3, rising just 2% year over year. (At the cloud intelligence group, things weren’t much better — sales were up only 3%.)

Wu did say he’s installed “a new management team to execute Taobao and Tmall Group’s strategy and drive business growth.” Whether this will succeed, however, remains to be seen.

In the meantime, much of the company’s future growth in earnings per share (or ADS) may depend on share buybacks, concentrating what profits the company does earn among fewer shares outstanding. To help with that, the company’s board is authorizing a new $25 billion share repurchase program that could see as much as 13.5% of the company’s share count bought back and retired.

At a current valuation of just 8.4 times trailing free cash flow, buying back shares right now could be the smart move to make. If, that, is to say, Alibaba can get its earnings growing again.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.

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