Alibaba Group (NYSE:BABA) stock posted its quarterly earnings before market open this morning, but its strong first-quarter results beat are not likely to matter. The day before, Aug. 14, the Dow Jones Industrial Average fell 800 points. Fear in the markets is rising and threatens to scare off investors from China-based stocks.
Despite the market volatility in the short term, what is there to like from Alibaba’s first-quarter results?
Before diving into its fiscal first-quarter numbers, look first at what Alibaba reported in the previous quarter. In its last quarter, BABA stock posted non-GAAP earnings per share of $1.28 (GAAP EPS of $1.47), with both figures beating expectations by a wide margin. Revenue grew a solid 51%, rising to $13.93 billion. After the results, BABA stock fell from around $195 to as low as $150 a month later. The U.S.-China trade war started intensifying at the time, pressuring investors to dump China-based stocks like Alibaba.
Without that trade war, Alibaba stock should have traded well into the $210 range and higher. Instead, at a recent closing price of $162, its price-to-earnings ratio is just 4.3 times while its PEG ratio was 1.23.
For its Q1, analysts had a consensus EPS estimate of $1.49 on revenue of $15.86, up roughly 30% from last year. And with all 18 analysts calling Alibaba stock a “buy” with an average price target of $218.94 (per TipRanks), investors must hold the stock and sit tight.
Alibaba Stock’s First-Quarter Results
Alibaba reported earnings of $3.55 billion on revenue of $16.74 billion, up 204% from last year. Chinese stocks are suffering from the trade war yet Alibaba managed to cushion the negative impact of lower exports. Strong domestic demand lifted the active consumer base by 20 million. Active annual consumers at its China-based retail marketplaces reached 674 million. Core commerce revenue grew a solid 25% year-over-year, digital media advertising grew 6%, while cloud computing grew 66%, to $1.13 billion.
Drilling into the segments, the company’s core commerce generated $14.14 billion, cloud computing generated $93 million and innovation initiatives generated$18 million. The cloud computing is the only segment that did not beat consensus. Still, an increase in average revenue per customer led the revenue growth for the cloud unit. In the June quarter, Alibaba launched over 300 new products and features related to the core cloud offerings. As it continues investing heavily in talent and technology infrastructure, Alibaba Cloud will continue growing.
Strong Performance at Alibaba’s Retail Unit
The fast-growing consumer community at Taobao lifted the growth in core commerce. Active annual customers grew, helped by referral programs through the Alipay app and a record-breaking 6.18 Mid-Year shopping Festival. Taobao expanded its market reach by attracting customers in less developed areas.
Tmall, formerly the Taobao Mall, leads the consumer engagement and distribution platform for Chinese brands. During the quarter, the gross merchandise volume of physical goods, excluding unpaid orders, grew 34% year-over-year. Higher user numbers and average spending drove the growth in sales.
Unavoidable Macro Headwind
Alibaba could have reported results as impressive as that of JD.com (NASDAQ:JD) but will not enjoy as big a jump in the stock price in the coming days. JD.com’s market cap is 10 times smaller than that of Alibaba stock. Plus, the stock price is in the $160 range, which makes shares less liquid for small-time investors. When Alibaba splits its shares at 8:1, expect bigger rallies in future earnings reports. Writer William White explained the BABA stock split here.
For its second quarter, JD.com reported revenue growing 23%, while earnings of $0.33 beat consensus by 25 cents. Service revenue grew 42% year-over-year while its operating cash flow almost doubled, to $4.53 billion. Its stock enjoyed a bounce of more than 10%. Whether an investor holds JD.com or Alibaba, the long-term prospects are strong for these firms. Alibaba is more comparable to Amazon (NASDAQ:AMZN). Both firms have a hugely successful online retail channel on the desktop and mobile, and Alibaba’s cloud services is certain to bring in high profit margins in future quarters. At a forward P/E of 53 times, Amazon trades at a big premium compared to Alibaba. Alibaba’s forward P/E is 19 times
Bottom Line on BABA Stock
Alibaba will enjoy just a small bounce post earnings despite the company’s outlook looking stronger than ever. Investors who remain unconcerned over the ongoing trade war should accumulate Alibaba stock.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
