Chinese e-commerce giant Alibaba Group Holding Ltd. (BABA, Financial) posted its first-quarter earnings on Thursday, reporting its core business kept growing.
Revenue grew 61% from the prior-year quarter to 80.92 billion yuan ($11.7 billion), topping Thomson Reuters' expectations of 80.75 billion yuan. Earnings, however, slumped because of a one-time event related to Ant Financial, Alibaba’s affiliate that runs payments service Alipay.
Alibaba’s core commerce segment, which focuses on shopping sites Tmall and Taobao, accounted for about 86% of its top line, with revenues clocking in 69.19 billion yuan, a 61% year-over-year increase. Moreover, the e-commerce giant has also been expanding its cloud and entertainment businesses, which registered a 93% increase in revenue to 4.7 billion yuan and a 46.4% increase in revenue to 6 billion yuan.
"The exceptional growth across our major segments of core commerce, cloud computing and digital media and entertainment validates our strategy of investing in customer experience, product, technology and infrastructure for the future," Chief Financial Officer Maggie Wu said.Ă‚
Alibaba’s net income declined 40.8% to 8.69 billion yuan. Moreover, operating margins fell to 10%, compared with 15% in the previous quarter and 35% in the year-ago quarter. The decline was attributed to a one-time stock-based compensation loss in the form of an increase in Ant Financial’s valuation. It increased Alibaba’s payables to Ant’s employees by 11.5 billion yuan, weighing on the parent company's bottom line.
Also weighing on the operating margins were its investments in Singapore-based online retailer Lazada and the acquisitions of food delivery startup Ele.me and local services company Koubei. The company said it expects its margins will continue to be negatively impacted by these businesses since they have different cost structures.Ă‚
This is nothing to sweat about, though, as the company still has great fundamentals. While Alibaba's recent investments have weighed on its results, the Street is banking on the long-term potential it unfolds as a result of the near-term pain. Moreover, analysts are bullish on the company’s plans to expand its presence in India by partnering with one of the major conglomerates there in order to compete with Amazon (AMZN, Financial) and Walmart's (WMT, Financial) Flipkart.
While fears regarding a trade war between the U.S. and China have weighed on the stock’s performance, multiple analysts believe the negativity is overblown. Moreover, the company’s recent acquisitions position it as a great play to expand into smaller cities and capture market share.
Operating in the world’s most populous country, experiencing massive changes in consumer preferences and spending willingness, Alibaba seems to have immense long-term potential. It’s trying to become the Amazon of China, and much more, as its services don't just include business-to-business and online sales, but its also foraying into the offline brick-and-mortar stores, cloud computing and payment services.
Down nearly 12.7% in the last two months, Alibaba seems to be a bargain at the moment. Floating a forward price-earnings ratio of 29.5 as compared to Amazon’s 112.36, the stock does grab investors’ attention. Moreover, impressive gross merchandise volume numbers in China coupled with double-digit growth across all segments make a case for Alibaba.
All told, the world is now shifting toward a data game. With a presence in multiple sectors and industries, Alibaba will have access to tons of data, which it can leverage to learn about consumer spending patterns and behavior. This makes Alibaba’s ads more effective and targeted, contributing to its top line and growth.
Disclosure: I do not own any of the stocks mentioned.
