Alibaba Pre-Earnings: Expecting Solid Quarterly Results But Can It Maintain Stock Momentum?

All eyes will be on Alibaba (NYSE:BABA) on Tuesday, November 4th, when the e-commerce behemoth reports its quarterly results. After surging by 40% on its first day of trading on September 19 to $94, the company’s share price fell to $85 before bouncing back to $99 levels. Expectations on the Wall Street are high, and any miss on earnings or guidance could send the stock tumbling. We expect solid performance across both top and bottom lines during the quarter, with active buyers reaching close to 300 million.

There is tremendous growth opportunity for Alibaba to expand its business both within China as well as in international markets. Rising Internet penetration, along with an increasing proportion of Internet users shopping online, will spur huge growth in China’s e-commerce market for years to come. We also expect Alibaba to flex its cash muscle to expand in the international markets of U.S,, Russia and Brazil. We’d be keenly tracking the earnings call to know more about the management’s perspective regarding strategic growth priorities.

Though we are bullish on Alibaba’s long-term growth prospects, we believe it is fairly valued at $80, which represents around 20% downside to the current market price.

See our complete analysis for Alibaba

Alibaba Will See Strong Growth Across Chinese Retail Marketplaces

Around 90% of our Alibaba’s valuation ties to its Chinese marketplace business model. While the retail online marketing business in China accounts for around 55% of Alibaba’s value, remaining 35% can be attributed to transaction commissions and storefront fees earned from Tmall, Juhuashuan, 1688.com and Taobao.

A rise in average annual spending per active buyer on Chinese marketplaces and the number of average active buyers will drive growth in the Chinese business. We expect the former metric to rise from RMB 7,808 ($1,271) in 2013 to about RMB 12,270 ($2,096) by the end of our forecast horizon (2021). Online shopping currently comprises for only 7.9% of total consumption in China and we think this figure could cross 20% in the long-run. Increasing per-capita consumption, coupled with enhancement in product categories, as well as delivery efficiency and quality control, are some of the other factors that will push up annual spend per buyer.

We also forecast the number of average active buyers to grow from 231 million at the end of 2013 to 527 million by the end of 2020. At the end of 2013, China’s internet penetration rate stood at 45.8% and only 49% of Internet users shopped online, leaving significant room for further expansion in these metrics. ^[1]

Mobile Commerce And International Expansion Will Spur Revenue Growth

Since more than 80% of China’s Internet users access web though mobile devices, we believe the mobile platform will be a source of growth for Alibaba in the coming quarters. The share of mobile in Alibaba’s Chinese GMV (gross merchandise volume) has risen from a mere 1.4% in quarter ending Jun 30, 2011 to 32.8% in quarter ending June 30, 2014. Correspondingly, the number of Alibaba’s mobile monthly active users (MAUs) rose from 136 million in December 2013 to 188 million in June 2014. The company continues to make investments to strengthen its mobile presence – it recently acquired UCWeb, the maker of China’s most popular mobile browser. Hence, we expect the share of mobile in total GMV to rise rapidly in the future.

International expansion is another area which could propel Alibaba’s revenue growth. Alibaba already participates in international commerce through Alibaba.com and AliExpress, and with the recent IPO it could use its huge cash reserves to expand into the markets of North America, Latin America and Russia. It could do so by localizing its websites, improving quality standards and delivery efficiency. We currently forecast revenues from Alibaba’s international marketplaces to reach RMB 15 billion ($2.56 billion) by the end of our forecast period. However, if this figure were to reach RMB 36 billion instead, it could add another $5 to our current price estimate for Alibaba.

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1. China’s Internet population hit 618 million at the end of 2013, with 81% connecting via mobile, The Next Web, January 16, 2014 [↩]