Back in mid-September, Alibaba (BABA) pulled off the biggest IPO in history, raising a staggering $25 billion. Investors saw the deal as a huge opportunity to benefit from the growth in ecommerce in China.
And yes, BABA stock has been a winner, up about 50% from its IPO price. But on the heels of its first earnings report as a public company, the response has been lukewarm. So far in today’s trading, the stock is up about 2%.
To see why, let’s dive into Alibaba earnings: In the quarter ended September 30th, revenues jumped by 54% to $2.74 billion but net profits plunged by 39% to $494 million, or 20 cents per share.
A big part of this decline came from the charges for equity compensation for employees (this is fairly normal for newly public companies). So, after excluding these costs, the adjusted earnings were 45 cents per share, which was in line with the Street consensus for Alibaba earnings. Although, the company did beat on the revenue side by about $130 million.
The main drivers for Alibaba earning were its two marketplaces, Taobao and Tmall. The marketplaces generated a combined $90.5 billion in transaction volume in the quarter, up 49% on a year-over-year basis. Over the past few years, Alibaba has invested heavily in adding premium brands, like Nike (NKE) and Burberry, to boost revenues. All in all, it seems to be working.
But mobile was also a catalyst for Alibaba earnings. Consider that smartphones and tablets represented about 35.8% of transactions on Taobao and Tmall. In all, there are 217 million active users on mobile, up from 188 million at the start of June.
Alibaba Earnings: No Guidance, but Future Looks Bright
While there was no guidance on Alibaba earnings, the company is likely to continue to grow at a strong pace. There is little evidence of a slowdown in user growth. Then again, it helps that Alibaba is moving into smaller cities and even rural locations. There are about 632 million Internet users in China, which compares to Alibaba’s 307 million active users — Alibaba still has plenty more users to find.
But future Alibaba earnings should get a lift from other businesses, such as cloud computing and the payments segment. Interestingly enough, there is buzz that the company may enter a partnership with Apple (AAPL) for mobile payments.
Despite all this, BABA stock still faces some hurdles. First of all, China’s economy has been decelerating lately. So given the massive scale of Alibaba, revenues could come under pressure if there is a fall in consumer spending.
At the same time, the competitive environment is heating up in China’s ecommerce market. JD.com (JD), which is the No. 2 operator in the market, has been getting lots of traction. Actually, the company has joined forces with Tencent (TCEHY), which operates the largest messaging app in China, WeChat. The platform has already proven to be effective with ecommerce transactions.
BABA stock could also feel the weight from the expected move into digital content. Alibaba co-founder Jack Ma was in Hollywood last week, presumably in an attempt to strike up deals.
Bottom Line for BABA Stock
True, the market potential in China is enormous. But the content industry can be extremely expensive and volatile.
Given the run-up in BABA stock already, it’s probably best to wait on jumping in. As see with today’s Alibaba earnings report, it looks like Wall Street has effectively baked in much of the growth.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.