Alibaba Group Holding Ltd (BABA) Stock Still Cheap After Q1 Earnings Pop

Alibaba's Q1 is hugely impressive, and should push Alibaba stock to continue a torrid run

By Vince Martin, InvestorPlace Contributor
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Alibaba Group Holding Ltd (NYSE:BABA) posted yet another blowout quarter on Thursday morning … and shares are soaring in response. BABA stock is up more than 5% in pre-market trading, and has nearly doubled just since late December.

The question, obviously, is whether Alibaba stock has more room to run after such torrid gains. Bear in mind that BABA has added about $200 billion in market value in just nine months.

Still, fiscal first-quarter earnings out Thursday show why another leg up doesn’t just seem possible … but probable.

An Impressive Q1 From Alibaba

Even for a company with a track record of beating analyst expectations, Alibaba’s first quarter looks good. The headline numbers:

  • Revenue of $7.4 billion rose 56% year-over-year, growing more than 8 percentage points faster than Street estimates suggested. The top line came to $7.51 billion.
  • Net income of $2.07 billion was up 96% year-over-year.
  • Adjusted EPS of $1.17 swamped consensus estimates of 94 cents per share, with the figure growing 58% in dollars and 65% in renminbi.

Simply put, the numbers are impressive. And what’s bullish for BABA stock is not just the earnings beat, but how Alibaba drove that beat.

Operating and EBITDA margins both expanded, despite the company’s continuing projection that those margins would narrow as the company entered new fields. Execution and leverage offset that potential pressure.

In the Core Commerce segment, online marketplaces Taobao and Tmall posted strong user and GMV (gross merchandise value) growth. International revenue rose 136% year-over-year, and is on track to reach at $2 billion run rate. Alibaba has even begun targeting the US market.

Alibaba’s cloud business, long a secret weapon for Alibaba stock, cleared the 1 million-customer mark. ARPU (average revenue per user) continues to rise, which both proves consumers’ loyalty to the platform and portends further margin expansion and profit growth. Alibaba’s cloud business remains well behind those of, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT).

But that business, too, is nearing a run rate of $2 billion in annual revenue. And a 96% increase in that revenue year-over-year makes its growth profile look much like Microsoft Azure in recent quarters or Amazon Web Services during its initial ramp.

All told, the quarter looks extremely bullish for Alibaba as a business.

BABA Stock Remains a Buy

It seems likely that Alibaba needed this kind of major beat to push the stock even higher. Chinese peers Weibo Corp (ADR) (NASDAQ:WB) and JD.Com Inc(ADR) (NASDAQ:JD) both pulled back after their earnings beats. As Matt McCall put it last week, there was a bit of a “buy the rumor, sell the news” reaction to both stocks.

With Alibaba stock having run so far, so fast, it seemed a candidate for a similar post-earnings response. And any miss relative to expectations seemed to set up a potential bout of profit-taking.

But Alibaba’s Q1 was not just a beat — it was a monster beat. And the fact remains that BABA stock doesn’t look that expensive, particularly with the raised expectations coming out of the quarter. Fiscal 2018 EPS expectations probably move above $5 coming out of Q1, suggesting a low-30s P/E multiple, and closer to 30x backing out the company’s almost $9 per share in cash.

That’s a reasonable price to pay for 50%-plus growth. And with Alibaba’s exposure to both the Chinese market and Asia-Pacific as a whole — the cloud offering now is available in fourteen countries, for instance — that growth isn’t coming to an end anytime soon. Alibaba may be considered the “Amazon of China” (though that comparison isn’t entirely accurate). But even with BABA shares at an all-time high, they surely aren’t valued like AMZN.

All told, Q1 was a huge victory for Alibaba. And that means Alibaba stock is undervalued, even after breathtaking gains so far this year.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

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