Here we go again. Alibaba (NYSE:BABA) has declined after earnings. This time around, Alibaba stock dropped almost 6% on Friday after releasing its fiscal fourth quarter report that morning.
I’ll offer two quick and seemingly contradictory takes on the sell-off. The first is that I’m not surprised. Alibaba stock rarely has shown much strength after earnings reports, and often some weakness. With short-term pressure from the coronavirus, the market’s reaction isn’t shocking.
The second take is that I don’t understand why Alibaba stock sold off. Nor do I necessarily understand why it has done so in the past. Alibaba keeps posting spectacular numbers. Investors shrug, and then eventually BABA rallies. The coronavirus has kept a lid on the stock of late, but shares shave more than doubled since the beginning of 2017.
To be sure, there are some risks. Q4 numbers were somewhat soft in context of recent performance. There’s saber-rattling going on as U.S. politicians threaten to delist Chinese stocks. It’s even possible we’ll see the trade war get resurrected in some form.
But those are short-term worries that have hung over Alibaba stock for a while now. President Donald Trump was discussing delisting Chinese stocks all the way back in September.
The long-term case is completely intact — and Alibaba stock now is back below $200. I don’t believe it will stay there for long.
Yes, Earnings Are Strong
It’s worth taking a step back to understand what Alibaba accomplished in its fourth quarter. Amidst a nationwide pandemic and off a base of over $13 billion in revenue in the year-prior quarter, the company posted 22% revenue growth. Margins did compress a bit — unsurprisingly given the circumstances — but adjusted net income still rose 11% year-over-year.
Those are staggering figures, yet it seemed like investors wanted more. It’s possible some investors expected something more like the performance from Amazon (NASDAQ:AMZN), whose online business has been a huge beneficiary of stay-at-home policies.
But 22% growth still is impressive, even if it’s the slowest growth rate Alibaba has ever posted. And, as is often the case, investors assuming that Alibaba is just the “Amazon of China” are badly oversimplifying.
Amazon is benefiting because the market share it’s taking from brick-and-mortar retailers is greater than the pressure on that market from consumers tightening their belts. Alibaba, however, is so much larger relative to the economy that it couldn’t escape the disruption the novel coronavirus posed.
As chief executive officer Daniel Zhang noted on the fourth quarter conference call, Alibaba now accounts for a staggering one-sixth of China’s total retail sales. Amazon’s retail revenue is less than 3% of the U.S. total.
Alibaba’s massive share makes it more sensitive to economic trends. It minimizes the benefit of the shift to online that Amazon and Walmart (NYSE:WMT), among others, have received. Investors who are disappointed in Alibaba’s fourth quarter numbers — and, for its part, Wall Street wasn’t — shouldn’t be.
Why Earnings Back Alibaba Stock
Meanwhile, looking closer, there’s even more room for optimism.
For one, Alibaba, somewhat incredibly, still is adding customers. Active customers rose by 72 million in fiscal 2020, or by more than 10%. And as the company noted repeatedly, customer acquisition was particularly strong in “less developed” (i.e., more rural) areas.
Those disclosures no doubt are aimed at assuaging fears about market share gains by Pinduoduo (NASDAQ:PDD). That e-commerce company has joined Alibaba and JD.com (NASDAQ:JD) in the Chinese e-commerce race by focusing on smaller cities and rural customers. Alibaba’s numbers suggest that the giant is having success fighting back.
Pinduoduo also saw revenue growth slow in its first quarter, but PDD stock gained over 14% on the news. That gain only adds to the sense that the early reaction to Alibaba earnings has been misguided.
The other key point of optimism in Alibaba earnings is strength in cloud. Alibaba is building a cloud business not just for China, but for Southeast Asia and beyond. Cloud optimism has helped Amazon stock — but didn’t help BABA on Friday.
That’s despite the fact that the business grew revenue 58% year-over-year in Q4, and 62% for the year. Bear in mind that the fourth quarter ended March 31 when disruption from the coronavirus was still an issue. As Zhang noted on the call, the newer cloud ecosystem in China created disruption, while more mature companies in the West pivoted more nimbly.
As Chinese life returns to normalcy, cloud growth may well accelerate. That’s likely true for Alibaba as a whole.
Why BABA Will Rally
To be honest, I’m simply not sure what earnings report investors were looking at on Friday. Nor do I understand why BABA is back below $200.
After all, look around. Amazon added almost $300 billion in market value so far this year thanks in large part to cloud optimism. Alibaba too is a cloud giant, and its stock now is down 4.2%. PDD stock has gained 71% so far in 2020. JD stock is up 52%.
If there was something in the Q4 earnings report that explains those discrepancies, I didn’t see it. And that’s because it isn’t there.
Alibaba is one of the world’s leaders in e-commerce and cloud, with enormous tailwinds on the way. Yet the stock trades at 27x FY20 adjusted earnings per ADS (American Depositary Share).
That’s ridiculously cheap for the type of growth Alibaba is putting up, and will continue to put up. Investors seemed to forget that on Friday, but I believe they’ll remember soon enough.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.