Alibaba Earnings Preview: Trends We Are Watching

All eyes will be on Alibaba (NYSE:BABA) on Thursday, May 7th, when the Chinese Internet behemoth reports its financial results for the quarter and fiscal year ended March 2015. Coming on the heels of disappointing results by other Internet heavyweights such as Twitter and LinkedIn, Wall Street participants will be keenly watching this earnings release. The company’s stock has been trading on negative sentiment over the past few months on the back of concerns related to slowing growth and increased regulatory pressure. Though it was trading at around $100-110 in December 2014, it is now down to just over $80 (near its 52-week lows).

We think these quarterly results could see some impact from Alibaba’s efforts to restrict the sale of counterfeit products on its marketplaces. In addition, the growing share of mobile platform in the overall GMV will further weigh on top-line growth due to lower monetization rate on mobile devices. At the same time, we expect the profitability to decline in the quarterly results due to heavy growth in expenses with acquisitions of new businesses and investments in growth strategies.

See our complete analysis for Alibaba

Impact Of Recent Developments On Taobao’s Growth Will Be Tracked

Lately, Alibaba has come under increased pressure to limit the sale of counterfeit products on its Taobao marketplace. Earlier this year, the Chinese regulator ‘State Administration for Industry and Commerce’ (SAIC) had criticized the company for not doing enough to crack down on illegal activities on its marketplaces. While the report was later taken down from the regulator’s website, it had caused some reputational damage for the company. And recently, the American Apparel & Footwear Association (AAFA) expressed worries pertaining to widespread sale of counterfeit products on Taobao marketplace. ^[1]

We believe these developments could impact transactional growth on Taobao in the near-term. This is because we believe the company may have stepped up its efforts to remove controversial listings on its marketplaces, which could have led to closure of a large number of seller accounts. Moreover, this issue could have also hurt demand owing to quality concerns. We expect JD.com to have been the direct beneficiary of these developments, as it has tighter control on quality, owing to its direct sales business model.

Notwithstanding these short-term issues, we believe the long-term growth potential for Alibaba remains solid due to the immense runaway ahead in the Chinese e-commerce market. Rapid growth in China’s Internet penetration rate and in the popularity of online shopping will continue to drive demand in the industry. Though the Internet penetration rate and the number of Internet users shopping online were recorded at 47.9% and around 360 million respectively in China at the end of 2014, we expect these metrics to increase to over-65% and 700 million over the long-run. ^[2] Alibaba’s strategy to expand into new product categories (such as furniture, healthcare, car accessories, food products, etc.) and to penetrate further in lower-tier cities and rural areas will fuel its demand in the coming years, in our view.

While Mobile Will Drive Overall GMV, Its Lower Monetization Rate Could Impact Earnings

Another trend that is impacting the Chinese e-commerce market is the rapid explosion in mobile user base. The share of mobile users in Alibaba’s overall GMV has risen rapidly from 19.7% in Q4 2013 to 41.5% in Q4 2014. In addition, its mobile monthly active user base surged by 95% annually in Q4 2014 to 265 million. This accounted for around 80% of the overall annual active buyer base.

The mobile platform has a lower monetization rate (1.96%) as compared to the desktop monetization rate (around 3.2%), due to its smaller screen size. This has caused the revenue growth to lag GMV increase on Alibaba’s marketplaces, and we expect this trend to continue in the current quarter. Over the long-run, we expect mobile monetization rates to move closer to desktop levels, with improvement in the quality and targetability of mobile ads. We will also be keenly tracking monetization rates on PC devices, as the same had decreased in the past quarter due to headwinds related to pay-for-performance monetization. 

We will revise our $97.11 price estimate for Alibaba’s stock, post the earnings release.

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1. Alibaba bows to US pressure over fake goods, The Financial Times, April 14, 2015 [↩]
2. China Internet: 649 Million Users, 86% On Mobile; Advertising Trends, Barron’s Asia, February 3, 2015 [↩]