Alibaba Poised For Further Growth

  • Alibaba reported improving monetization trends, paired with robust volume growth.
  • Net income doesn’t compare very well to prior periods, but the high profitability excluding investment income reveals that Alibaba’s profit margin is respectable when compared to peers.
  • The favorable economic backdrop, paired with high growth potential in Chinese e-commerce should be considered when determining whether or not to invest into Alibaba.

Alibaba poised to grow

Alibaba (BABA) recently updated its F-1 filing to reflect Q2 earnings. The reported earnings figures offered further confirmation of the strengths of the e-commerce business, along with further improvements to the gross/net profit margin figure. Alibaba continues to absorb the benefits of a growing consumer economy in China. Outward looking forecasts indicate that there’s further growth potential.

Improving key performance metrics

Alibaba mobile monetization

Source: Alibaba

The mobile monetization rate, for all mobile transactions jumped from .98% to 1.49%, which basically means that the revenue that Alibaba generates per mobile transaction, improved by 50-52 percentage points. The year-over-year growth in mobile revenue, in Q2 was 923%. Both mobile transaction volume as well as the amount of monetization per transaction improved, which drove the significant growth in this segment.

Alibaba’s mobile growth is on track ahead of its upcoming IPO, and helps to substantiate the argument that Alibaba will trade at a reasonable valuation in relation to sales and earnings growth.

Alibaba GMV and mobile penetration

Source: Alibaba

In Q2, the mobile penetration rate improved from 27.4% to 32.8%. Meanwhile, gross merchandise volume grew 45.2% year-over-year. The growth rate in gross merchandise volume, paired with higher monetization of that volume, drove the bulk of the revenue growth, which trickled down to the bottom line. However, net income growth was driven by appreciation in some of its equity holdings, which was reflected in the interest and investment income line item.

According to Alibaba:

Our net interest and investment income increased significantly from RMB466 million in the three months ended June 30, 2013 to RMB6,828 million (US$1,100 million) in the same period in 2014. The increase was primarily due to a net gain of RMB6,251 million (US$1,008 million) recognized with respect to the revaluation of previously held equity interests, relating primarily to the step acquisitions of UCWeb and OneTouch.

Alibaba revenue_Net Income_Gross profit

Source: Ycharts

In Q2, Alibaba reported $2.535 billion in revenue, $1.798 billion in gross profit, and $1.99 billion in net income. Revenue grew by 45% YoY, whereas income from operations grew by 26.7% YoY.

The gross margin figure was 70.9% for Q2 quarter, and the net profit margin was 78.6%. However, when excluding the impact from investment income, the net profit margin was 31.4% which is respectable, when compared to other e-commerce entities.

The economics of Chinese commerce

China consumer spending growth

Source: Trading Economics

Consumer spending continues to trend higher in China, with the consumer spending figure reaching 212,187 Chinese Yuan. The improving spending figure coincides with a consumer confidence metric that’s consolidating, paired with a growing disposable income per capita figure.

China disposable income per capita

Source: Trading Economics

China consumer confidence trends

Source: Trading Economics

The continued improvement in aggregate data indicates that Alibaba’s economic environment continues to offer favorable tailwinds. Experts on Chinese e-commerce believe that the market will grow exponentially for many more years.

According to McKinsey & Company:

By 2020, we project, that Chinese e-tailing will match the combined size of today’s U.S., Japanese, UK, German, and French markets, reaching $420billion-$650 billion in sales. This has the potential to generate incremental gain of 4-7 percent in private consumption. The major enabler of the continued growth will be enhanced 3G+, and broadband penetration.

Conclusion

Alibaba is well positioned, as it will leverage its scale across its various marketplace platforms to capitalize on the ever expanding Chinese e-commerce market. While the market for e-commerce is large currently, the outward growth potential of the emerging Chinese middle class should not be underestimated.

Despite the favorable growth trends in gross merchandise volume and the improving monetization rates; investors should be wary of participating in the Alibaba IPO. This is because IPOs are known to be excessively volatile, and if the stock moves against the retail investor, it’s unlikely that the retail investor will have the conviction to hold onto the stock if it were to fall considerably in value.

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