Alibaba Group Holding Ltd (BABA) delivered its highest revenue growth rate in four quarters, but caution still remains the order of the day for BABA stock amid a decelerating Chinese economy.
You’d never know that the Middle Kingdom’s economy was in trouble going by Alibaba’s top-line results, which easily beat Wall Street expectations. If the Chinese consumer is weakening, there was little sign of it at the country’s largest e-commerce company, even if the bottom line came in light.
For the most recent quarter, Alibaba’s earnings grew 97% to the U.S. dollar equivalent of $793 million, or 33 cents a share. On an adjusted basis, which is what the Street cares about, earnings per share rose 1% to 47 cents. Analysts polled by FactSet were looking for earnings of 55 cents.
But the market easily overlooked the shortfall thanks to tremendous top-line gains. Revenue grew 39% to to $3.75 billion, which easily topped analysts’ average estimate of $3.57 billion. The gains were driven by a 24% rise in gross merchandise volume — or the total value of goods transacted on its platforms on China retail marketplaces — to 742 billion yuan.
As Wedbush Securities analysts told Reuters:
“Whatever they are doing must be working, and most importantly it’s a sign that the Chinese consumer may not be weakening quite yet. Alibaba represents a big part of the spend by Chinese consumers and so a re-acceleration in volumes is an indication that the Chinese consumer continues to be strong.”
BABA Stock: Cheap, but Risky
Shares of Alibaba popped on the news, but it may not last long. After all, the market’s view seems to be that it’s only a matter of time before a flagging economy catches up to Chinese consumer spending. Just take a look at Alibaba stock’s underwhelming performance since going public.
The largest initial public offering in history has been a dud. Alibaba stock closed its first day of trading at $94 a share. Today, BABA goes for almost 20% less than that level. Even the less-than-spectacular S&P 500 managed to generate a price gain of 2% over the same period.
Sentiment could sour on Alibaba because of its vast exposure to China’s economy, however, which poses a threat to the future of BABA stock.
And with a forward price-earnings ratio of just 21 despite a projected compound annual growth rate of more than 25% a year, the market seems cautious on Alibaba’s ability to grow amid an economic slowdown.
Still, Alibaba’s quarterly report is largely welcome news, and the company’s resilience in face of a sluggish economy is no doubt impressive.
But it’s still hard to like BABA when the macro picture is so dour. It doesn’t matter how good revenue growth looks if the market believes in its bones that it’s just not sustainable.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
