Alibaba said it is working on a rival to ChatGPT, the artificial intelligence chatbot that has caused excitement across the world. Alibaba said its own product is currently undergoing internal testing.
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Alibaba reported earnings for its fiscal third quarter that smashed expectations, sending the tech giant’s U.S.-listed shares 6% higher.
Here’s how Alibaba did in its fiscal third quarter, which ran from Oct. to Dec. 2022, versus Refinitiv consensus estimates:
- Revenue: 247.76 billion Chinese yuan ($35.92 billion) vs. 245.18 billion Chinese yuan expected, up 2% year-on-year;
- Earnings per American depositary share: 19.26 yuan vs. 16.26 yuan expected, up 14% year-on-year;
- Net income: 46.82 billion yuan vs. 34.02 billion yuan, up 69% year-on-year.
Around $600 billion has been wiped off the value of Alibaba since its peak in Oct. 2020, as a tightening regulatory environment on tech firms in China along with strict Covid-19 control policies — and subsequent economic slowdown — hit the e-commerce giant.
Alibaba shares in Hong Kong closed higher Thursday ahead of earnings, as investors bet that China’s economic reopening will help boost consumer sentiment and spending, which will ultimately help the e-commerce giant. During the December quarter, China abruptly ended its strict Covid controls such as lockdowns, although this is not likely to be fully reflected in the quarter.
Meanwhile, China’s regulatory tightening of the past two years is beginning to ease, as enforcement of the rules becomes more predictable.
Revenue from Alibaba’s biggest business, the China commerce division, which includes its popular marketplace Taobao, totaled 169.99 billion yuan, down by 1% year-on-year. The drop was driven by a 9% year-on-year decline in customer management revenue, obtained from services such as marketing that Alibaba sells to merchants on its Taobao and Tmall e-commerce platforms.
Alibaba said that gross merchandise volume — or the value of transactions across the company’s online shopping platforms — “declined mid-single-digit year-over-year, mainly due to soft consumption demand and ongoing competition as well as a surge in COVID-19 cases in China that resulted in supply chain and logistics disruptions in December.”
The company said that it sees a rebound in China’s economy and consumption.
“Looking ahead, we expect continued recovery in consumer sentiment and economic activity,” Daniel Zhange, CEO of Alibaba, said in a press release.
Amid a slowdown in its China activity, Alibaba has sought growth in overseas markets through its South East Asia business Lazada and through global e-commerce site AliExpress. International commerce revenue grew 18% year-on-year to 19.47 billion Chinese yuan.
Analysts are expecting Alibaba to see faster revenue growth over the coming quarters as the full effect of the Chinese economic re-opening is felt. Morgan Stanley named Alibaba its “top pick” in the Chinese tech sector for the first time in three years, in a recent note.
Last year, Alibaba embarked on measures to control costs in order to improve profitability. The company is trying to find a balance between costs and continuing to make important investments for long-term growth.
Those efforts look to be paying off with a 69% year-on-year jump in net income. The company’s operating margin stood at 14% in the December quarter, higher than the 3% reported in the same period of last year.
Alibaba managed to reduce losses across all of its business in the December quarter, including in its logistics arm Cainiao and its cloud division.
“During the past quarter, we continued to improve operating efficiency and cost optimization that resulted in robust profit growth,” Toby Xu, chief financial officer of Alibaba, said in a press release.
Alibaba’s employee headcount at the end of the December quarter stood at 239,740, a reduction of more than 4,000 from the quarter before.
Cloud slowdown persists
Alibaba reported cloud revenue of 20.18 billion Chinese yuan in the fiscal third quarter, up 3% year-on-year. This marked a slowdown from the 4% revenue rise seen in the previous quarter and remains far off the more-than 30% growth rates seen in the past.
Cloud computing accounts for just 8% of the company’s revenue but is seen by analysts as a future growth driver of the company.
Alibaba said it also saw growth from non-internet industries such as financial services, education and automobile firms using its cloud services. However, it saw a decline in revenue from the public services industry.
Alibaba said this month that it is working on a ChatGPT-style of technology that could be integrated into its products. ChatGPT is the highly popular chatbot product from OpenAI. It is an example of so-called generative AI, where artificial intelligence is used to generate images or text.
Zhang said on an earnings call Thursday that Alibaba is looking to “capture the market opportunities” to provide the computing power required, via its cloud division, to generative AI applications. Generative AI requires huge amounts of data processing to train an AI model. This needs lots of computing power which cloud companies could offer.
“We expect to see exponential growth in demand for compute power,” as these technologies develop, Zhang said.
Alibaba did not provide more details on its ChatGPT rival, but said that it would not be “having a chatbot for the sake of having a chatbot.”
Instead, Zhang said that Alibaba would integrate the chatbot “into business around consumption, around user experience, content generation to drive higher advertising effectiveness.”
He added, “A.I. can play a huge role in all of those different areas.”
Alibaba buybacks continue
The company is also trying to boost the confidence of shareholders amid a slump in its stock price. In November, Alibaba said its board had approved an additional $15 billion as part of its existing $25 billion share buyback program which will be extended to the end of its 2025 fiscal year.
For the December quarter, Alibaba said it repurchased 45.4 million American depositary shares for approximately $3.3 billion under its share buyback program.
Alibaba is also in the process of making Hong Kong a “primary” listing for its shares, paving the way for mainland China investors to trade the stock directly. However, the company said in November that the process would not be completed in 2022 as it had initially planned.