Alibaba Stock Will Gain From Falling Digital Media Losses

Advertisement

When is a money-losing segment not a concern for a company? When it brings something else to the table. Alibaba (NYSE:BABA) has reported single-digit revenue growth in its digital media segment in the latest quarter. The digital media segment had revenue of RMB 6.3 billion compared to RMB 5.97 billion in the year-ago quarter. This equals to 6% growth in that segment, which was the slowest among all Alibaba stock’s parts.

Alibaba Stock Will Gain From Falling Digital Media Losses

Source: Nopparat Khokthong / Shutterstock.com

However, Alibaba also reported a steep reduction of 30% in EBITA loss from this segment. Improvement in margins in this segment should increase the overall EPS and boost the sentiment towards Alibaba stock.

Alibaba is rationalizing cost to improve the impact of digital media on subscriber growth. Despite modest revenue growth, Alibaba’s Youku saw a 40% year-over-year increase in average daily subscribers. The increase in subscribers and falling EBITA loss shows that Alibaba is able to improve its strategy in this segment to gain the maximum benefit. Digital Media segment brings customers to Alibaba’s platform which can be monetized through other services. Hence, even at a loss, this segment is vital for the future growth of Alibaba.

Impact on Alibaba Stock

The digital media segment has been the biggest money loser for Alibaba over the past few quarters.

Despite having a massive amount of data about customer preferences and over 700 million monthly active users on its mobile platform, Alibaba has found it difficult to show positive margins in this segment. The company is changing its strategy by reducing costs and giving more importance to subscriber growth.

Fig: Single-digit growth in Digital media segment compared to year-ago quarter. Source: Alibaba filings

The EBITA loss in this segment reduced from RMB 3.1 billion to RMB 2.2 billion. This led to a fall in EBITA loss margin from 52% in the year-ago quarter to 35%.

Source: Alibaba filings

The reduction in EBITA loss by 30% is a promising trend. We should see a continuation of this trend in the next few quarters if Alibaba continues to focus on cost.

Halo Effect

Alibaba’s digitial investment is similar to Amazon (NASDAQ:AMZN). Both these companies make investments in content to improve their subscription base. Alibaba does not mention the subscriber numbers but we can estimate it from recent filings from Tencent (OTCMKTS:TCEHY). Recently, Tencent Video has hit 96.9 million, up 30% YoY.

Even if Alibaba has half as many subscribers, this would still be more than 50 million. This subscriber base would be a small fraction of over 700 million monthly active users who use Alibaba’s retail platform. Hence, Alibaba has a long growth runway in improving the subscriber base.

Fig: Youku is among the top 5 SVOD services. Source: Ampere Analysis

This segment provides a strong halo effect for other services. At the beginning of this year, Alibaba produced “The Wandering Earth.” This was the all-time second-highest-grossing box office movie. Alibaba ran full-screen ads in Youku to promote this movie.

Youku provides Alibaba with new options to monetize subscribers. This includes the retail platform, food delivery, advertising and other services. Hence, even if the digital media segment continues to show losses, it is advantageous for Alibaba to continue its investments in this segment.

Future Trend

Despite the decline in EBITA loss, Alibaba is still losing $1.5 billion annually through its digital media segment. As mentioned above, we should continue to see it accept those losses because of the advantages this segment provides to Alibaba’s ecosystem. The important metric to watch would be the growth in subscribers. Alibaba’s arch-rival Tencent has a strong control over social media apps in China. These apps drive huge customer engagement which allows Tencent to promote other services.

Youku is the ideal option for Alibaba to retain customers on its own platform. This will reduce the importance of Tencent’s platform and also help Alibaba in increasing its own e-commerce sales.

Fig: Alibaba closes the gap with other smart speaker companies. Source: Techcrunch

According to a recent report by Canalys, Alibaba is one of the top smart speaker sellers. It is giving massive discounts to encourage multiple smart speaker purchases per household. This is very similar to Amazon’s strategy. By controlling the device, platform, and content, Alibaba should be able to improve customer retention.

Improving margins in Digital media, faster subscriber growth and good market share in smart speaker segment should help Alibaba in building a strong ecosystem with a good moat for its services.

Investor Takeaway

Alibaba’s digital media is the biggest loss-making segment for the company. However, this segment showed a sharp decline in EBITA loss in the recent quarter as the company tried to rationalize cost and focused on return on investment. The revenue growth was a mere 6% in this segment, but the average daily active subscribers increased by 40%, which is more than the YoY growth reported by Tencent Video.

The digital media segment helps in improving the attraction of Alibaba’s ecosystem. The company can also monetize digital media customers through other services and the e-commerce platform. If you’re thinking about investing, focus on the subscriber growth. This will show the retention ability of Alibaba compared to other competitors and increase the growth runway for BABA stock.

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


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/falling-digital-media-losses-will-benefit-alibaba-stock/.

©2024 InvestorPlace Media, LLC