Alibaba (BABA) stock surged 4% on Tuesday after the Chinese e-commerce leader reported fiscal second-quarter earnings.
What many investors expected from Alibaba earnings was a significant decline in growth amid a slowdown in China’s economy. However, CEO Jack Ma tried to tell investors that these concerns were not valid.
So after seeing what really drove revenue growth higher, BABA stock investors should feel really good about the future.
There have been a lot of fears surrounding the future of Alibaba stock over the last several months. These fears range from a slower-growing Chinese economy to concerns of BABA losing market share. However, I explained in a recent article that neither concern will actually create a major problem for Alibaba stock long-term, and the reason is BABA’s ability to increase its take rate, thereby creating higher revenue.
In its fiscal second quarter, that’s exactly what happened.
Take Rate Driving Alibaba Stock
While BABA’s total revenue rose nearly 32% in the quarter, gross merchandise sales increased 28% to $112 billion.
In the past, Alibaba stock’s earnings performance was a near identical reflection of how quickly gross merchandise sales rose. However, since BABA earns its revenue by selling advertising and by marketing products to vendors, it has a great opportunity for better monetization in the years ahead, and is not completely dependent on how fast the e-commerce market grows as a whole.
Still, it’s nice to see BABA’s take rate rise, as that creates confidence for the future. Alibaba earnings showed the company’s take rate rising 12 basis points year-over-year to 2.42%. While that may seem insignificant, even a 12 basis point rise represents a 5% increase year-over-year, and that’s why revenue growth outperformed gross merchandise sales growth.
This represents a nice increase, but there is still room for major improvement.
For example, it’s mobile that is driving this increase in profitability, and mobile is also where much of BABA’s growth is being created. Alibaba earnings showed a 183% increase in mobile revenue, which thereby increased mobile’s percentage of total marketplace revenue from 29% last year to 61% now. The reason this is important is because BABA’s take rate in mobile rose 52 basis points to 2.39%, near equal to its overall take rate.
Bottom Line for BABA Stock
Given the rapid growth of mobile combined with its take rate increase, investors should remain very optimistic about the future of Alibaba stock. Beyond the likelihood for continued, aggressive top-line growth, BABA remains very profitable. The company’s free cash flow of $2.14 billion represents growth of 52% year-over-year, implying an increase in margin.
Nevertheless, the Chinese e-commerce market’s growth is going to start slowing in the years to come. EMarketer expects the industry to grow 32% this year, 27% next year, and then 22% in 2017 before finally becoming a $1 trillion market.
Therefore, BABA still has a golden opportunity, but its growth should exceed the market’s performance as its take rate rises, mobile continues to grow and its business to consumer site Tmall continues to thrive; Tmall’s gross merchandise sales grew 56% in this last quarter.
Altogether, Alibaba stock is still a great buying opportunity at just 22 times next year’s expected earnings, leaving room for significant upside in BABA stock.
As of this writing, Brian Nichols owned shares of Alibaba.
