Is Alibaba Stock A Buy After The Earnings Beat?

  • Alibaba beat market consensus for both revenues and EPS.
  • Impressive three-digit YoY growth in emerging businesses in international commerce, Aliyun and Digital Media.
  • Adding potential income from AliPay IPO and Didi Chuxing makes Alibaba stock attractive.

Chinese tech and e-commerce giant Alibaba (NYSE:BABA) reported outstanding FY 2017 Q1 earnings results with higher-than-expected revenues and EPS figures. Alibaba achieved these earnings after its stock price rallied by 40% amid the Didi and Yahoo deals and the consistent diversification process the company is undertaking. The results reaffirmed the massive growth thesis of the bullish view of the market.

In an earlier article, I had pointed to a few areas where investors should focus on, in the earnings release: the global expansion trend, AliPay, Aliyun (a.k.a. AliCloud), and the M&A processes. First of all, e-commerce continues to play a fundamental role in the company’s business as it generates 84% of its revenues, including Chinese and international e-commerce platforms like TMall, Taobao, AliExpress, Lazada, and Alibaba. The total revenues of the core commerce segment rose 47% YoY to more than $4B in Q1 2017, driven by a massive 24% YoY growth in GMV and improvement in mobile monetization, mainly in China.

The internal breakdown of the core commerce segment unveiled an interesting growth trend in the international side of e-commerce segment. Even though global e-commerce (retails and wholesale) accounts for a minuscule 9% of the total commerce business,  the retail section of the international commerce business is the fastest growing business within the segment with an astounding 123% YoY growth, driven mainly by the Lazada subsidiary in Southeast Asia, which was recently acquired for $1B.

In the cloud computing segment, Aliyun continued its rapid growth pace and reported not only an incredible 156% YoY growth, but also a significant improvement in EBITDA margin from -76% in Q1 2016 to -13% in Q1 2017. This business is still losing money as it scales around the world, but it will slowly start to benefit from economies of scale as it grows worldwide. Aliyun is the second most profitable segment with Digital Media & Entertainment and Innovation Initiatives having an EBITDA margins of -32% and -166%, respectively. Although these segments are losing money, these emerging revenue streams are increasing at impressive rates though high content expenses and other operational costs have dragged down their profitability. However, as long-term investments, they are reasonable.

The revenues mix is still far from being correctly weighted. However, Alibaba is forcefully going in the direction to optimize the revenues mix among the segments as a long-term strategic target. With Aliyun being the crown jewel in Alibaba Holdings, the direction of the company is clear, and it might seem familiar to investors who are following Amazon. Alibaba is moving in the same direction as Amazon did a few years ago when it tried to drive growth from its cloud business. Besides expanding its cloud business worldwide and opening data centers in strategic locations around the world, the company is also assisting global tech companies to penetrate the Chinese market by using Aliyun’s infrastructure.

Alibaba’s results present an optimistic future for the company which succeeded in increasing revenues and GMV while the Chinese economy tumbles and many global companies struggle in mainland China. The emerging revenue streams such as Aliyun, digital media and entertainment and global e-commerce expansion will drive the future growth. Adding potential income from a possible AliPay/Ant Financial IPO and future Didi Chuxing developments, there is a bright future for Alibaba, and that is without discussing any possible impact from the Yahoo (NSDQ:YHOO)Verizon (NYSE:VZ) deal that might affect Alibaba in some way. I remain bullish on Alibaba stock as a long-term investment.

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