- Alibaba stock has surged after the company beat analyst estimates with its Q3 2016 earnings.
- Most of Alibaba's growth metrics were good.
- But can Alibaba hold on to these gains in the midst of turmoil in China?
Shares of giant Chinese e-commerce company Alibaba (NYSE:BABA) have surged more than 4% in pre-market trading after the company delivered healthy Q3 2016 results that beat both top and bottom line estimates. Alibaba reported third quarter revenue of RMB 34.54B ($5.25 billion), good for 31.9% Y/Y growth, and RMB 1.28B ($0.19B) better than analyst estimates. Alibaba posted non-GAAP EPS of RMB 6.43 ($0.98) a robust 78% Y/Y growth and RMB 0.62 ($0.09) better than estimates.
Alibaba’s GMV, or Gross Merchandise Value, grew 23% Y/Y to RMB 964B ($146.57). Alibaba does not usually provide quarterly revenue and earnings guidance, and continued with its tradition during its third quarter earnings call.
Important Takeaways From Alibaba’s Latest Earnings
Alibaba’s latest set of earnings have been received well by the investing world primarily because they have helped assuage growing fears about the Chinese market. When the Beijing government recently announced that the Chinese economy had grown by 6.9% during the fourth quarter, the headline that dominated news feeds was that China’s economic growth had hit its lowest point in 25 years. Even so, some investors were still skeptical whether the Chinese government had not fudged growth figures to paint a rosier picture of the state of China’s economy.
However, Alibaba’s latest results prove that China’s economy is alive and well. Results by Alibaba’s chief rival, JD.com (NASDAQ:JD) help to reinforce the notion that reports about a collapsing Chinese economy have been greatly exaggerated. JD recorded GMV growth of 82%. We do not as yet have JD’s revenue and earnings figures for the latest quarter. During the previous quarter, however, JD.Com’s GMV grew 76% Y/Y to $18B compared to Alibaba’s $112B.
Investors will perhaps be surprised to learn that JD actually enjoys almost double Alibaba’s revenue despite having a much smaller GMV base. JD posted revenue of $6.9B during the third quarter, almost double Alibaba’s $3.5B, and good for 52% Y/Y growth, thanks to the company’s business model. JD caters to the affluent Chinese shopper mainly in large Chinese cities, and this strategy seems to be paying off. Selling high-end merchandise allows JD to enjoy a much higher take rate of 38.3%, which is exceedingly high for a large e-commerce platform, compared to Alibaba’s 3.1%, which is about average for an e-commerce site its size. The company’s GMV growth actually accelerated during the fourth quarter while Alibaba’s remained constant.
It’s not 100% clear at this point if JD is to blame for Alibaba’s top line growth which has dropped off from the mid 40s-percentage a few years back to the low 30s currently. But one thing is clear: JD is stealing market share from Alibaba. Alibaba still has a much larger absolute GMV, but as long as JD’s GMV continues expanding at a much faster clip than Alibaba's, Alibaba will continue losing market share to its smaller rival.
At the moment this is not a major cause of worry for Alibaba investors, since JD caters to a different niche than Alibaba. But if JD decides to start going mainstream in the future, the popularity of the platform could provide Alibaba with sleepless nights.
JD.Com shares have followed the Alibaba stock higher after the earnings call.
Will Gains By Alibaba Stock Last?
In my Alibaba earnings preview, I expressed my fears that Alibaba stock might be hard-pressed to make lasting gains due to the extreme negative perception of Chinese stocks by investors. Recent checks by Evercore and ITG Research found that Alibaba’s business has not been impacted materially by the ongoing turmoil in the Chinese equity markets. Yet Alibaba stock was down close to 15% YTD going into the earnings call and 33% over the past 12 months. Looking at Alibaba’s past results, it’s possible that the company’s three consecutive earnings misses prior to Q2 2016 had spooked investors and had helped fuel the anti-Chinese sentiment on Wall Street. Q3 2016 however, marks the second consecutive quarter in which the company has exceeded estimates.
Will Alibaba gains last? My guess is that the stock will remain volatile for a couple more quarters until investors finally become convinced that Alibaba’s business is quite immune to the vagaries of the Chinese stocks market. Now might be a good time to buy Alibaba stock, but only for long-term investors looking to hold the shares for at least 18-24 months.