Alibaba Earnings: China E-Commerce, Cloud Computing, Acquisitions Drive Strong Results

Alibaba (NYSE:BABA) announced its fiscal Q1 earnings on August 11, reporting a 39% year-over-year increase in revenues to RMB 24.2 billion. ^[1] The company reported similar growth in revenues in the March quarter as well, with Cloud Computing and Digital Media driving much of the growth. The trend has continued in the June quarter as well, with cloud computing, digital media and entertainment revenues rising by a massive 177% to RMB 5 billion. Alibaba’s largest division is the online retail business in China, which includes Taobao, Tmall and Juhuasuan. This is also one of the fastest-growing segments within the company, with June quarter revenues increasing by 49% year-over-year to RMB 23.4 billion.

Alibaba’s online retail segment in China was boosted by an 18% increase in annual active buyers and a 39% increase in mobile monthly active users (MAUs) to 434 million and 427 million, respectively. Complementing the increase in users/buyers, the total gross merchandise volume (GMV) handled by Alibaba’s Taobao and Tmall websites was also up through the quarter.

We forecast Alibaba’s full year retail revenues to continue to grow at a solid pace, fueled by growth in both MAUs and the average spend per user. Domestic retail revenues could grow by over 30% to just under RMB 100 billion for the full year, 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. (Note: GMV = MAUs x average spend per user).

Alibaba has witnessed robust growth in the Cloud Computing domain over the last couple of years, owing to an increase in the total number of paying customers for its cloud computing product offerings. The total number of paying customers stood at 500,000 at the end of the March quarter, which reached 577,000 customers by the end of the June quarter – an 119% annual increase. Resulting revenues from cloud computing were up 156% y-o-y to RMB 1.2 billion. (Read more: Where Will Alibaba’s Cloud Computing Growth Come From In The Next Five Years?)

Additionally, Alibaba’s Digital Media and Entertainment revenues – which include online video streaming, music streaming, mobile gaming and the mobile browser – were up by 286% on an annual basis to RMB 3.1 billion. This was primarily inorganic growth from the Youku Tudou acquisition at the end of the March quarter. ^[2]

In terms of profitability, 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. This is mainly due to the fact that Alibaba is currently operating at a loss on all its non-commerce divisions. Alibaba is spending a lot on developing platforms for cloud computing, acquiring traffic for the online video and music segments, and investing in content and production with a longer term view. Alibaba’s operating profit margins declined in 2014 and 2015 due to acquisitions of new businesses, investments in mobile, cloud computing and other growth initiatives, as well as increases in marketing expenses. This trend could continue in 2016, with the company’s EBITDA margin likely to compress by over a percentage point to around 51%, according to our estimates. Given its marketplaces model and the scalability potential of cloud offerings, online video and other digital media ventures, Alibaba will likely have relatively low variable costs in the long run, due to which its operating leverage will remain high. 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 Alibaba’s EBITDA margins start improving on a y-o-y basis.

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1. Alibaba Group Announces June Quarter 2016 Results, Alibaba Press Release, August 2016 [↩]
2. Alibaba Group Q1 2017 Earnings Call Transcript, Seeking Alpha, August 2016 [↩]