Alibaba Earnings Preview: Cloud Computing, Retail Business To Sustain Revenue Growth & Profitability

Alibaba (NYSE:BABA) is scheduled to announce its fiscal Q1 2017 earnings on August 11. ^[1] The company reported a solid 39% growth in revenues in the March quarter to RMB 24.2 billion, with the most pronounced growth coming from its cloud computing business. Cloud computing and internet infrastructure revenues were up by a massive 175% to RMB 1.1 billion. Comparatively, other revenues from mobile media and entertainment – which includes UCWeb Mobile browser, mobile games, online video streaming and music streaming revenues – grew by only 14% to RMB 1.7 billion. Alibaba’s largest division is the online retail business in China, which includes Taobao, Tmall and Juhuasuan websites. This is also one of the fastest growing segments within the company, with March quarter revenues increasing by 41% year-over-year to RMB 18.3 billion.

We forecast Alibaba’s full year revenues to largely mirror the trend from the first quarter, as evidenced from the table above. Domestic retail revenues could grow by over 30% to just under RMB 100 billion, driven by a corresponding increase in the total gross merchandise volume (GMV) handled by Alibaba. We forecast Alibaba’s GMV to increase by 26% to RMB 3.7 trillion in 2016. We arrive at the GMV figures as the multiplier of total number of buyers (or monthly active users) and the average spend per buyer. Internet penetration (particularly through mobile platforms) in lower-tier cities across China has contributed significantly to growth in this domain. ^[2]

We forecast the company’s cloud computing and internet infrastructure revenues to grow at over 60% year-over-year to RMB 3.8 billion. Alibaba’s management attributed the segment’s growth to an increase in the number of paying customers. The total number of paying customers in the March quarter doubled over the previous year quarter to 500,000. ^[3] (Read more: Where Will Alibaba’s Cloud Computing Growth Come From In The Next Five Years? and Amazon Vs. Alibaba: Cloud Computing & Infrastructure Growth)

To complement the top line growth, Alibaba’s adjusted EBITDA grew by 26% year-over-year to RMB 49 billion in 2015. We expect the company’s adjusted EBITDA to grow at 27% through 2016, albeit at a slower rate than its revenue growth. As a result, the company’s EBITDA margin could compress by over a percentage point to around 51%. Alibaba’s operating profit margin declined in 2014 and 2015 due to acquisitions of new businesses, investments in mobile, cloud computing and other growth initiatives, as well as rise in marketing expenses. Given its marketplaces model and the scalability potential of cloud offerings, Alibaba has relatively low variable costs, which implies that its operating leverage will remain high in the long run. However, there is likely to be near-term pressure on EBITDA margins due to increased investments, and it could take a couple of years before company-wide margins start improving again.

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1. Alibaba Group Will Announce June Quarter 2016 Results on August 11, Alibaba Press Release, July 2016 [↩]
2. Alibaba Q4’16 6-K Filings, SEC, May 2016 [↩]
3. Alibaba Q4 2016 Earnings Call Transcript, Seeking Alpha, May 2016 [↩]