I had posted my positive views on Alibaba (BABA, Financial) at the time of the company’s IPO and the stock has been moving smartly higher since the IPO. The stock currently trades at a record high of $119.45, and I remain bullish on Alibaba. This article discusses some of the positive factors that will take the stock to even higher levels.
Writing on Alibaba today was by specific choice as the company broke the global record for single day sales. By offering deep discounts on products, Alibaba sold more than 36.2 billion Yuan ($5.9 billion) of merchandise. This breaks the record for the highest single day sales of $5.29 billion in 2013 (U.S. Thanksgiving Day).
The record sales by Alibaba is just an indication of the company’s growing presence and impact on the online market space. Record sales also mean that Alibaba is all set for another strong quarter of earnings after reporting robust earnings for the quarter ended September 2014.
The record level of online sales by Alibaba also points to the fact that consumption related spending remains robust in China even at a time when the overall economic growth remains sluggish due to manufacturing and production based factors. I therefore expect Alibaba to clock strong sales growth in the coming quarter’s irrespective of the country’s economic growth trend.
Coming to the results for the quarter ended September 2014, Alibaba’s quarterly GMV increased by 49% to 556 billion Remnibi y-o-y. The GMV growth has averaged well above 50% in the last eight quarters, and I believe that this growth trend is likely to continue in the coming quarters as well.
Further, another very important trend that is driving growth for Alibaba is a sharp increase in annual active buyers. For September 2014, the annual active buyers were 307 million, representing an increase of 52% in annual active buyers as compared to September 2013 (202 million). With internet penetration still having some distance to go in China, growth in the number of active users will remain as one of the primary growth drivers in the quarters to come.
Investors would be concerned about the fact that the company’s EBITDA margin has declined from 59.4% for the quarter ended September 2013 to 50.5% for the quarter ended September 2014. However, it needs to be noted that the lower EBITDA margins come from consolidation of newly acquired businesses (mainly UC Web, AutoNavi) with lower margins coupled with increased investment in new initiatives and marketing.
With marketing initiatives showing the results and with investment in new initiatives such as mobile OS, local services and digital entertainment likely to show positive results in the coming quarters.
The company sales and marketing expense as a percentage of revenue has increased to 9.4% as of September 2014 as compared to 5.5% as of September 2013. During the same period, the company’s product development expense as a percent of revenue has increased from 8.7% to 11.2%.
Investors should therefore not be concerned about a drop in EBITDA margin. Strong revenue and EBITDA growth will continue even if it means some EBITDA compression through lower EBITDA businesses.
From a financial flexibility perspective, Alibaba is well positioned to massively expand and grow through acquisitions, marketing and new product offering. For the quarter ended September 30, 2014, Alibaba generated 8.9 billion Remnibi in free cash flow and the company had 109.9 billion Remnibi in cash and short-term investments. Therefore, funding rapid growth is not an issue for Alibaba and I expect to see a lot more in terms of acquisition and new product development over the next few years.
All these factors are likely to keep the stock trend bullish for Alibaba and I believe that the stock will continue to move higher from current levels. While the stock trades at a current PE of 54.8, this is not a matter of concern as the company is growing at a scorching pace. Alibaba trades at a FY15 PE of 39.5, which is much lower than the current PE and if the company can sustain the current growth levels, the stock will continue to move higher.
Investors can therefore still consider exposure to the stock if one has missed on the initial part of the IPO rally. The long-term upward journey for Alibaba has just started and the company is making the right moves towards becoming bigger and better.
