Alibaba’s Disappointing Earnings Are Nothing More Than Growing Pains

Alibaba - Alibaba’s Disappointing Earnings Are Nothing More Than Growing Pains

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Alibaba Group Holding Ltd (NASDAQ:BABA) turned in a quarter that disappointed analysts and sent the shares skidding over 3% in pre-market trade February 1.

Net income was up 36% year over year at $3.586 billion, $1.41 per share fully diluted, on a 56% gain in revenues to $12.761 billion. For most companies this would be outstanding, as 28% of revenue still hit the net income line.

The problem is analysts had been expecting $4.4 billion, $1.67 per share of income. The previous year also showed fatter margins, as much as 34% of sales turning into income.

Alibaba has been one of the biggest winners in my retirement account. I bought some at $93 per share in November 2016, and it opens for trade February 1 at about $197 per share. Alibaba has been very, very good for me.

So, should I sell, or can this horse take me further?

Why the Failure?

The first task is to examine why Alibaba failed.

Investors should have expected it. Executive chairman Jack Ma has been saying for some time he wants the company to be more real, and less virtual.

Alibaba has run an “asset light” model. Unlike Amazon.com, Inc. (NASDAQ:AMZN), which many insist on comparing it to, Alibaba doesn’t generally take control of inventory. Instead it connects manufacturers, wholesalers, retailers, and customers together.

This has created an enormous gray market that has attracted less than savory business in the past. Alibaba has long been plagued by the sale of fake goods through their site, including counterfeit designer items and fake refuge boats.

Alibaba has not abandoned this business entirely, but says it’s working to clear counterfeits and has built a “new retail” model in which it takes goods directly to consumers within China. This has meant buying its own retail and distribution infrastructure. Note that Amazon’s store barely breaks even after accounting for these costs. So declining revenues for Alibaba are far from surprising.

For this reason, some investors have moved toward TenCent Holdings Ltd (OTCMKTS:TCEHY), which is focused in online content like movies and video games. Alibaba has tried to copy some of this, but that means buying content and waiting to see whether people like it.

Why Stick Around?

Once you understand all this, why stick with Alibaba?

For one thing, Alibaba is going well beyond China, not just with its retail operations but with its cloud. That means more than hosting bare infrastructure, as Amazon does, but building applications, such as a traffic control system in Kuala Lumpur, Malaysia. 

Alibaba is backing innovative start-ups using both its capital and technology. Through apps like MYbank, Alibaba facilitates small loans to Chinese companies usingelectronic infrastructure rather than branches.

These technology capabilities are now being marketed globally through its sponsorship of the Olympics, where it is replacing International Business Machines Corp. (NYSE:IBM) as primary technology supplier, creating a test bed for applications and building the global brand.

Alibaba Unbounded

The bottom line is that Alibaba is not bound to a single industry like many companies. Having a cloud doesn’t keep it out of applications. Selling banking software doesn’t mean it can’t back a bank. Being an online merchant doesn’t mean it can’t open malls.

This diversity means that the company can handle a few setbacks — like some slowed growth as they switch retail models.

This doesn’t mean it’s the go-go stock of yesterday. But it is a far more stable company, one which — unlike TenCent — has some heft to it. And like Amazon, it is using its success to build in new areas, to grow up.

I like owning grown up companies. So I’m staying in the stock.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/alibaba-disappointing-earnings-growing-pains/.

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