Much has been said about growth prospects of core segments of Alibaba but its non-core segments could further lift BABA stock in 2018.
After almost doubling in 2017, shares of Jack Ma led Alibaba Group Holding Ltd (NYSE:BABA) are gaining momentum ahead of the company's fiscal third-quarter earnings next week. Alibaba stock has gotten off to a decent start in 2018 gaining more than 11% with the latest pop of more than 4% in the last trade. A spike in trading volume was the most likely reason behind yesterday's pop. The counterfeit goods issues have come back to haunt the Chinese e-commerce giant which might have raised some eyebrows about Alibaba stock's prospects in 2018. However, the growth prospects of BABA stock still look solid.
Over the last year, we have in detail covered the multiple growth drivers for BABA stock which were largely related to its core commerce segment. However, the non- core segments could also play a big role to boost the stock's fortunes in 2018. Earlier, we had highlighted how the online retail giant's cloud computing business could also be a huge contributor to its growth. But, in 2018, it's much less talked about Digital Media and Entertainment segment could come to the forefront and act as a tailwind to Alibaba stock this year. Here's why.
Digital Media & Entertainment segment could be another bright spot this year.
Alibaba's Digital Media & Entertainment segment mainly consists of UCWeb, news feeds and mobile search and video content platform Youku Tudou. In the September quarter, the segment revenue grew 33% YoY to $721 million from. At the same time, the adjusted EBITA margin of this segment improved to negative 36%. Now, if the research reports of the firm eMarketer are to be believed then the Digital Media & Entertainment could be in for steady growth going ahead. The research firm eMarketer in its first-ever forecast of subscription over-the-top (OTT) video market in China painted a very rosy picture.
The report forecasts that in 2018, nearly 229 million people in China will watch video via a subscription streaming service. It also states that '37% of digital video viewers in China will watch online content using a subscription OTT video service this year, such as iQiyi, Youku Tudou or Tencent Video.' This market is reported to have grown by more than 80% in 2017 with more than two-fifths of digital video viewers in China expected to use an OTT service by 2019. The e-commerce giant is executing its content strategy effectively as in the last earnings the top management stated the company had seen a 180% YoY increase in daily average subscribers of Youku video subscriptions during the quarter ended September 30, 2017. With such optimistic forecast of the sector, Youku Tudou could give a good boost to revenues going ahead in spite of rising content related costs which slightly pulls down the adjusted EBITA margin of the segment.
Advertising revenues could further boost Digital Media & Entertainment segment revenues in 2018.
Alibaba is one of the big players in digital advertising space in China which is dominated by the BAT companies( Baidu (NASDAQ:BIDU), Alibaba and Tencent (OTCMKTS:TCEHY)). With another eMarketer research report suggesting a strong outlook for programmatic ad spending in China in the coming years, the Jack Ma led retail giant is also likely to be a big beneficiary of that. Programmatic digital ad spending in China is expected to reach $29.61 billion (RMB196.73 billion) in 2019, almost double the amount allocated in 2017. With Alibaba's UC browser and its family of apps, which is the leading browser, in south-east Asia, the company has a great chance of boosting its advertising revenues going ahead. The programmatic digital video only accounts for 24% of total digital video ad spending in China as of last year, that is not supposed to change much this year as well. The report further suggests that BAT companies are too big almost brushing aside smaller and other players which results in most advertisers buying ads directly from one of the three BAT companies. Hence, OTT video publishers like Alibaba's Youku Tudou might continue to primarily sell ad slots at a premium. The rising advertising revenues from Youku Tudou was also cited as one of the reasons for the much-improved performance of Digital Media & Entertainment segment in the earnings call.
Despite the concerns around Alibaba stock, in all likelihood, Chinese eCommerce behemoth will continue to post strong growth figures in its core commerce segment. But, now, with its non-core segments also gaining momentum, Alibaba is likely to get a further boost from them. Alicloud revenue almost doubled from RMB 1.5 billion in the same quarter last year to almost RMB 3 billion the second quarter of FY 2018. And, now the outlook for Digital media and entertainment segment also looks bright. One should also take note of the huge investments the company is making to keep the growth engine running. Alibaba stock could be all set for another blockbuster earnings release given the strong performance at its Singles Day sales. Wall Street is still very bullish on BABA stock, with 43 out 45 analysts having a buy or strong buy rating on the stock, according to Yahoo Finance. The earnings release next week could again set the stock rolling.
Looking for fundamentally strong China-based companies to invest in? One Chinese stock in our picks has delivered more than 600% return since 2011. Then do check out Amigobulls' top stock picks, which have outperformed the NASDAQ by over 138%. Further, if you're also looking for top picks from the auto sector, you should also check out our top auto stock picks, which have beaten the S&P 500 by over 283%. If you're a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.