- Alibaba reported its Q3 2015 earnings before market hours on January 29.
- Alibaba revenue missed estimates by $230 million and beat on EPS by 6 cents per share.
- Alibaba revenue growth, huge profitability and significantly large free cash flows make it an attractive long term investment option in the e-commerce space.
Alibaba (NYSE:BABA) reported its December quarter earnings on January 29th before market hours. The company beat analyst consensus earnings estimates of $0.75 by 6 cents and missed analyst revenue estimates of $4.45 billion by $230 million. The revenue miss led to a sell-off in Alibaba stock, which has seen BABA stock price lose 8% in the three trading sessions following the Alibaba earnings call for Q3 2015. Is the sell-off justified? Is the beaten down Alibaba stock a good long term bet? Let’s take a closer look at the numbers and do a complete Alibaba stock analysis.
Alibaba Revenue: Rapid Growth Continues
Alibaba revenue might have missed the analyst estimates, but the company reported revenue growth of 40% YoY. This is far more than modest and considering that the base was $3 billion, the Alibaba revenue run rate is impressive.
The revenue growth has been slowing down, and this is a trend which is expected to continue as the base numbers get bigger. Alibaba revenue growth in the latest quarter was driven by 32% YoY growth in its China operations accompanied by a 39% growth in international operations. The 266% growth in the other segment line was driven by revenue from acquired businesses UCWeb and AutoNavi.
Alibaba Earnings Decline
The broad based revenue growth did not translate into Alibaba earnings growth as profit margin declined across gross, operating as well as net levels. The Non-GAAP EBITDA (earnings before interest tax depreciation and amortization) margin also contracted by 2.3 percentage points over the year ago quarter.
|Profit margin analysis||Dec-13||Dec-14||YoY change|
|Gross profit margin||77.7%||71.3%||-6.5%|
|Non-GAAP EBITDA margin||60.0%||57.7%||-2.3%|
The profit margin declines were driven by an 80% growth in Cost of revenue as well as Product development expenses and 59% growth in sales and marketing expenses, which significantly outgrew the revenue and came in at 52% of revenues. The profit margin contractions were driven by acquisition of lower margin businesses and investments in mobile OS, local services and digital entertainment services.
Alibaba Operating Metrics
The growth in Alibaba mobile GMV was one of the encouraging numbers in Alibaba’s report, with the mobile GMV contributing 42% to the total GMV. This is up from 20% in the year ago quarter and 36% in the preceding quarter (Sep 2014).
|Operating metrics||Dec-13||Dec-14||YoY change|
|Mobile GMV (as % of Total GMV)||19.7%||41.6%||21.9%|
The global trend of users shifting from PC to mobile usage also had its impact on Alibaba as the blended monetization rate for the quarter ticked lower driven by an increase in mobile GMV to total GMV and also a drop in pay for performance (P4P) monetization rate on account of user experience improvement on PC. As we know, user experience and higher monetization are most often inversely proportionate, driving the blended monetization rate lower to 2.7% from 3.05% in Q3 2014 (year ago quarter).
Source: Alibaba earnings release
Alibaba also reported strong growth in the number of active buyers and also mobile monthly active users. Annual active buyers (12 months preceding the quarter end date) were up by 45% YoY and 9% QoQ, while the mobile monthly active users were up by 95% YoY and 22% QoQ.
Alibaba ended the quarter with a cash balance of 131 billion RMB ($21 billion) in cash and short term investments, up from 110 billion RMB at the end of the preceding quarter. The company generated free cash flow of 22.92 billion RMB ($3.69 billion), up 33% YoY with a free cash flow margin of 88%.
Alibaba Stock Valuation
Alibaba stock currently trades at the following valuations:
- LTM PE ratio of 66.9
- LTM price-to-sales ratio of 19.4
The valuations, though steep could be attractive for investors considering the e-commerce space, a sector which includes Amazon with its hefty valuations and slower than Alibaba growth. Alibaba outperforms its e-commerce peers Amazon and eBay on most metrics and in combination with the macro factors of China, it could present an attractive opportunity for a long term investors.
Alibaba reported a mixed quarter when compared to analyst estimates. However, the company reported a solid revenue growth. The earnings per share declined on account of higher share based compensation and effective tax rate in the quarter ended December 2014. The profit margin declines were along management’s earlier commentary. The quarter was a mixed bag overall and Alibaba stock continues to remain an attractive bet for long term investors looking to invest in the e-commerce space. The recent drop in stock prices could be a good entry point for the long term investors.