Some of the reports covering the record-breaking quarter of Alibaba Group Holding Ltd. (NYSE:BABA), announced before the market opened on Jan. 24, were just a bit misleading. Luckily, those trading BABA stock weren’t fooled.
A 26% fall in earnings? Maybe, if you squint right, and you’re looking for something to criticize, you can argue that earnings fell short.
But that was entirely due to investments made in digital media that will come back over time. And the growth in digital media sales, 273%, was a star of the earnings show. Entertainment even grew faster than the company’s cloud computing operations, and total revenue was up 54%.
If this is miss, I’ll take it.
Investors agree. Pre-market trading had BABA stock up to almost $102 per share, or about 4% higher. It’s still short of 2016’s high of $107 per share, and well short of the $115 per share achieved in early 2015.
But right now those records look due to fall.
Several Moving Pieces
Alibaba has several moving pieces, and a detailed earnings release offered real insight into them.
What the release reveals is that if you’re thinking of Alibaba as strictly a play on China, you’re thinking wrong. The fastest-growing segment of the business is “international commerce,” cross-border trade, mostly between China and other countries in East Asia, which was up 288% year-over-year, to $353 million, 4% of total revenue. That’s even faster than digital entertainment grew.
Chinese commerce still represents 80% of revenue, but that’s down from 86% a year earlier, even though retail sales were up 42% and wholesale sales were up 30%. It’s that wholesale number that is the heart of the original company. Alibaba, unlike Amazon.com, Inc. (NASDAQ:AMZN), with which it is so often compared, was founded to enable business-to-business commerce, opening up global markets for small Chinese producers.
Taken together, Alibaba had GAAP net income of $2.471 billion ($1 per share) and revenue of $7.669 billion. Just as Amazon remains a fraction of the size of Wal-Mart Stores, Inc. (NYSE:WMT), in other words, Alibaba is a fraction of the size of Amazon.
But BABA is growing faster.
Where Does BABA Stock Grow From Here?
While Alibaba does seek to replicate most of what Amazon does, including its movies and cloud operations, at the heart of the growth story lies trading.
Trading is profitable. You don’t have to buy what someone else is trading, just handle the logistics — the online elements, the transaction elements, the movement and warehousing. Thus, Alibaba has been able to deliver regular profits at a stage where Amazon could not, and this remains the case.
Non-GAAP earnings of $1.30 per share easily beat the analyst estimates of $1.13, and even the whisper number of $1.16. The big numbers remain in consumer commerce within China, dominated this quarter by a record-setting “Singles Day,” but the big growth is in other areas.
That growth is spectacular. With its latest quarter, Alibaba raised its own growth estimates for the year, from 48% to 54%.
Combine Alibaba’s bulk in commerce with its growth in international trade, entertainment and cloud, then add in executive chairman Jack Ma’s unique ability to straddle the fence between Chinese President Xi Jinping and Donald Trump, and you get an investment story that’s hard to beat. Yes, the price-to-earnings multiple of 52 looks rich, and it’s going up on these numbers, but that’s the way it is with a growth stock.
And we haven’t even mentioned Alibaba’s pending takeover of China’s large private shopping mall operator, Intime, or its work on artificial intelligence.
If you want a piece of that, the time to buy is now.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.