- Alibaba reported a beat on both top and bottom line in the latest earnings.
- Alibaba reported highest ever Singles' day sales in the history. But growth concern remains.
- SEC investigation and Trump presidency are the biggest headwinds for Alibaba stock.
Hangzhou, China-based eCommerce giant Alibaba reported impressive Q2 earnings. As I had predicted in my earnings preview, the company continued to show strong growth, delivering a beat on both top and bottom line expectations. Alibaba reported an EPS of $0.79 on revenues of $5.14 billion, against analysts' consensus of an EPS $0.69 on revenue of $5.04 billion. And then on the Singles' day, Alibaba reported its best ever sales in its history. Alibaba sold $17.7 billion worth of goods on the Singles' day! But in spite of all this, the stock is still down.
Why Is Alibaba Stock Crashing?
After gaining more than 30% this year, Alibaba stock is down 9% since the earnings report and more than 10% down since election results. So why is the stock crashing in spite of such strong results?
Also Read: Alibaba Stock Is Due For A Correction Now
Alibaba stock dropped from $99.9 to $92.2 within hours of the election result. This 7% drop was largely caused by the worry that President-Elect Trump will follow protectionist policies which will impact China-US trade relations. One of the main campaign promises of Mr. Trump was to bring back jobs to the US by erecting trade barriers and forcing companies to manufacture in the US. Mr. Trump had promised to slap up to 35% taxes on imported goods. Such a high tax rate will hit China's manufacturing sector which is one of the key drivers of the Chinese economy. The Chinese economy is already facing speed bumps. Any impact on its manufacturing will further slow down its economy. A slowing economy will dim Alibaba's growth prospect, impacting its valuations. The higher tariffs will also affect Aliexpress' sales.
Also, such an action from the American side is not likely to go unanswered by the Chinese. China may retaliate with its own protectionist measures which will impact the sale of foreign goods in China. In an editorial, Global Times suggested that Beijing could retaliate:
"China will take a tit-for-tat approach then. A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the US."
China has a growing middle class and affluent consumers who have strong aspirational demand for western luxury goods. Last year Chinese tourists spent $183 billion on shopping sprees abroad, a good deal of them for buying luxury goods. According to a report on Mintel.com, 58% of the Chinese consumers have bought foreign goods from local online eCommerce sites. Alibaba has used this trend to build its Tmall Global. In the just concluded Singles' day sale, thousands of foreign brands including Walmart (NYSE:WMT) and Apple (NSDQ:AAPL) had participated. A retaliatory tax increase by China on foreign goods will impact the sale of foreign goods. The sale of foreign brands is expected to produce around $2 billion in incremental revenue by next year. A trade war between the US and China will significantly impact this revenue source.
Another dampener is the ongoing SEC probe into Alibaba's accounting practices. Earlier this year, in May, the SEC launched a probe into what it called unfair accounting practices by Alibaba. The stock sold off nearly 10% on the announcement. Since then, the issue has been casting a gloom over the Alibaba stock. A recent NY Post story indicates that at least one insider is helping SEC in the investigation. There is speculation about the authenticity of the numbers reported by Alibaba, especially in the way it adds earnings from various segments. Any indictment or adverse comments will tarnish Alibaba's already shaky reputation, and a fine may impact its earnings.
Alibaba has strong fundamentals
Alibaba reported a strong earnings which beat on both top line and bottom line. Alibaba's revenue grew by 55% YoY beating analysts expectation of 44% growth, and earnings increased by 49%. The surge in revenue was powered by the all round performance of different segments. Core e-commerce revenue grew by 41%, while the cloud division grew by a massive 130%, in the process further reducing its operating losses. The revenues from digital media initiatives tripled over last year's numbers, while innovation initiatives grew by 78%.
While there are concerns surrounding Alibaba's ability to sustain its revenue growth and maintain its margins, the company has several tailwinds which will help it sustain its growth and profitability. The Chinese middle class is growing. According to a Mckinsey report, by 2020, the size of affluent customers, with income above $16000 will rise to 57% of the population. The internet penetration in China is also likely to improve, bringing more people online. Increasing penetration and growing middle classes will drive e-commerce growth. The cloud business is also growing rapidly, with Aliyun seeing strong adoption from customers and corporates. In the latest quarter, cloud revenues grew by 130%. Aliyun's paying customers grew by 13% during the quarter. Goldman Sachs pegs Aliyun's valuation at $42 billion, 10 times the expected 2020 revenue. The media business has strong potential. The deal with Amblin partners will encourage other content producing companies to tie-up with Alibaba. (Also read: Why Alibaba Stock Is A Strong Buy Now)
Should You Buy The Correction?
Alibaba stock is down in spite of reporting strong earnings and highest ever Singles' day sales. The stock is currently trading below $90. The main reason appears to be the surprise election of Donald Trump as the 45th President of The United States. Many expect his anti free trade policies to hurt both the Chinese economy, as well as sales of foreign goods in China. However, its impact on Alibaba is being exaggerated. It's also not clear, to what extent the president-elect will carry out his anti-trade policies as any protectionist measure will have their consequences. Alibaba stock is likely to remain volatile till a clear picture emerges about the US-China trade relations. However, its long-term story remains intact. The recent correction provides an opportunity for long-term investors to get into the stock.