Alibaba Earnings: Chinese Behemoth Facing Serious Headwinds

  • Alibaba revenue growth is slowing down.
  • China devalued its currency.
  • BABA stock hit new lows today, down 7%.
Alibaba Earnings review Q1 2016

Investors were not pleased with Alibaba Group Holding Limited (NYSE: BABA) earnings report for Q1 2016 announced before market open on August 12.  The Chinese e-commerce company missed revenue forecasts with sales of  20.25 billion yuan (about $3.27 billion) vs. the consensus estimate of $3.39 billion.  Alibaba earnings came in at $0.59 per share, just $0.01 above consensus estimates and 30% lower than $0.84 per share in the year ago quarter.

Although revenue increased 28% YoY, growth slowed significantly from the 56% YoY growth rate.  Concerns about continued slower growth sent the Alibaba stock reeling to all-time lows, down more than $5.25/share, a loss of nearly 7%.

Revenue growth slowed due to slowing gross merchandise volume (GMV).  The company missed forecasts on this number also.  Analysts expected 38% growth in GMV, while the company reported a 34% YoY growth in GMV.

Alibaba continues to grow very quickly, but the sharp drop in the stock price is due to the slow down in revenue.  This is typical of any growth stock that slows down.  There are few companies that are growing at such a rapid rate; and even fewer large enough for fund managers to invest in.  When the company stops growing as fast as it had previously, it is no longer worth as high a price multiple as it previously got.

As the rate of revenue growth has been slowing for the past three years, investors are wondering if this trend will continue until Alibaba is no longer a growth company.

Accompanying this concern for investors is the uncertainty in the Chinese economy, the second largest economy in the world.  Yesterday, China took the unannounced step of devaluing its currency, the yuan, to make Chinese products easier to export.  The yuan has plunged since yesterday's announcement.  Stock markets around the world tumbled in response to the news.  The Dow Jones Industrial Average was down over 200 points or 1.2%, an hour after the Open before recovering later in the trading session.

Earnings growth is falling substantially while revenue has been steadily climbing, albeit at a slower rate.  Previously, earnings nearly tripled from 2013 to 2014, climbing from $1.35 billion to $3.71 billion.

Investors have become increasingly concerned that the company will be unable to meet the super fast growth rates it had seen in the past.  Today's earnings release confirmed those fears.  The quarterly earnings announced on January 29, 2015, reported that the monetization growth rate had fallen substantially, a major headwind for future sales growth.

The hype for Alibaba has been based on the huge potential of the Chinese economy and has sent the stock to highly over-priced territory.  This should come as no surprise, considering that revenue has been slowing for years now.

Sentiment has soured considerably for Alibaba stock in 2015.  The falling Chinese stock market, the devalued yuan, and the uncertainty coming from China in recent weeks has added to this sentiment, sparking concerns among investors who have sold the stock in 2015.  Alibaba stock is down 30% year-to-date.

Alibaba continues to grow at a fast pace.  Alibaba stock may be a good buy at lower prices and at a later time, after the Chinese economy stabilizes.

Gregg Killpack Gregg Killpack   on Amigobulls :

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