Alibaba (BABA, Financial), the Chinese ecommerce giant, continued its double-digit growth story by posting 55% revenue growth during the second quarter. Alibaba’s revenue growth has considerably accelerated in the first six months of the current fiscal, reaching its highest level in two years.
There were a lot of questions about Alibaba’s future growth potential due to a slowdown in the Chinese economy, which impacted all types of businesses across the country. But contrary to local trends Alibaba has continued its upward march, posting above 50% growth in the past two quarters even when the economy did not do so well on a comparative basis.
One of the key reasons behind the above-average performance in the core commerce segment was the robust growth of Alibaba’s online marketing service revenue. Alibaba, a broker of sorts that provides the technology platform to connect buyers and sellers, has also added a digital marketing tool to its arsenal, merging digital marketing and digital commerce and positioning it as the one place to which the seller needs to come, place his goods, throw out ads, sell the product and walk out.
The one-stop solution model seems to work well for the company, and advertising revenues are expected to steadily climb in the next few years.
Shelleen Shum, eMarketer forecasting analyst, commented, “The heightened regulation on Internet advertising is expected to weigh heavily on Baidu’s (BIDU, Financial) search revenues in the near term as they roll out stricter standards across all advertisers. Although also affected by the new regulations, Alibaba’s ad revenue particularly from mobile shows no sign of ebbing with robust growth from the ecommerce retail business. We now expect Alibaba to take a larger share of digital ad revenues than Baidu in 2016.”
Despite robust growth on the top line as well bottom line, Alibaba, which was grossly overvalued during the time of its IPO, took nearly two years to cross the $93 level the company saw at the end of its first trading day. At nearly 60 times earnings, Alibaba still looks a bit expensive, but adding small bits of the stock over a long period could give your portfolio a nice exposure to an overseas company that is bound to stay in control of its home market for many years to come.
Alibaba’s current size and scale has made it a compelling case for global sellers who want wide access to Chinese customers. As such, the company will enjoy stable growth within the country for a long time. Internet penetration in China has just crossed 50%, and there is plenty more ground to cover. As an ecommerce company, Alibaba will stand to benefit as the Chinese economy keeps moving.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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