When Alibaba Group Holding Ltd (NYSE:BABA) reports quarterly results on Thursday, investors will not care much about the Chinese government cracking down on counterfeit goods. Chances are low that retailers listing on Alibaba faced any scrutiny over the legitimacy of their products sold. Besides, crafting laws that have stiffer penalties will not happen overnight.
For now, markets will look for the company reporting substantial growth again in the March quarter.
Earnings Expectations High for BABA Stock
From the 24 analysts covering BABA stock, the earnings estimate ranges from 56 cents a share to as high as 74 cents. Analysts expect an average EPS of 66 cents per share for Alibaba this quarter. They expect sales growing 48.5%, or revenue as high as $5.38 billion. The stock is trading near yearly highs, so the company does not have much room for missing consensus estimates.
Growth in Alibaba’s e-commerce platform likely continued in the quarter. Just as Amazon.com, Inc. (NASDAQ:AMZN) complemented its e-commerce business with its AWS cloud platform, Alibaba Cloud will do the same for Alibaba. AWS is growing at a phenomenal clip. Amazon.com migrated 23,000 customer databases after just a year of launch.
AWS has a $14 billion run rate. Conversely, Alibaba added 114,000 paying cloud customers during its third quarter. It ended the period with 765,000 customers.
Cloud computing revenue grew at an incredible 115% year-over-year. Alibaba cut prices on cloud computing products. This hurt top-line growth but helped the company grow the customer base. The unit had a -5% EBIT margin, improving from -41% in the previous year. Expect BABA to report similarly strong revenue growth figures again in the upcoming quarterly report.
Alibaba Diversifies into Mobile Gaming
Alibaba’s diversification into mobile game distribution will lower its reliance for its online e-commerce.
In March, BABA invested $145 million (1 billion yuan) by partnering with Mail.ru Group, TFJoy, Efun and ONEMT. The move should benefit Electronic Arts Inc. (NASDAQ:EA), Activision Blizzard, Inc. (NASDAQ:ATVI) and Take-Two Interactive Software Inc (NASDAQ:TTWO). EA’s “FIFA” and Activision’s “Overwatch” and “World of Warcraft” are established titles in China.
Netease Inc (ADR) (NASDAQ:NTES) and Tencent Holdings Ltd (OTCMKTS:TCEHY) are the gamer gatekeepers in China. Tencent distributes “Call of Duty Online” while Netease distributes Activision’s games.
Alibaba’s business transformation that embraced mobile continues to pay off. Last quarter, mobile MAUs grew to 493 million. Its internet user base continues to change from desktop to mobile. The company made $24 per mobile user, compared to $35 per user on desktop.
Users are spending more time on Alibaba’s mobile app. Expect that trend to continue in the quarter that just ended. This implies the revenue per user on mobile will go up, thanks to higher user engagement and better click-through rates.
Takeaway on Alibaba
Alibaba trades at sharp discount to Amazon.com but at a premium to eBay Inc. (NASDAQ:EBAY) on a P/E basis. If investors apply a discount rate between 11% and 12% on the five-year DCF Growth Exit model (links to finbox.io), the stock has a fair value of nearly $130 a share.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
