Alibaba Earnings Preview: Non-Commerce Businesses To Drive Strong Revenue Growth

Alibaba (NYSE:BABA) is scheduled to announce its fiscal Q2 2017 earnings on November 2. ^[1] The company reported nearly 40% growth in revenues in the March and June quarters, with the most pronounced growth coming from its cloud computing business. In the most recent quarter, cloud computing and internet infrastructure revenues were up by a massive 156% to RMB 1.2 billion. Additionally, digital media and entertainment revneues, which includes revenues from online video streaming Youku Tudou and mobile Internet services revenue from UCWeb , were up by 285% to RMB 3.1 billion. This was primarily attributable to the Youku Tudou acquisition, which completed earlier this year.

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 June quarter revenues increasing by 49% year-over-year to RMB 23.4 billion.

For the full year we forecast Alibaba’s China retail revenues to grow by 32% to around RMB 100 billion, driven by a corresponding increase in the total gross merchandise volume (GMV) handled by Alibaba. Alibaba’s China domestic GMV could increase by over 25% to RMB 3.7 trillion for the full year.

GMV for Alibaba is calculated as the multiplier of total number of buyers (or monthly active users) and the average spend per buyer. Alibaba has witnessed strong growth in monthly active users, especially in lower-tier cities across China due to the growing smartphone and internet penetration in these regions. ^[2] As a result, the number of buyers is expected to continue to increase over the next few years.

On the other hand, we forecast Alibaba’s cloud computing and other revenues to grow at over 60% year-over-year to RMB 3.8 billion. This growth trend is expected to continue over the next few years as Alibaba continues to invest in new ventures across digital media, cloud computing and internet infrastructure. Alibaba’s management has attributed the strong growth in cloud computing to an increase in the number of paying customers. The total number of paying customers in the June quarter more than doubled over the previous year quarter to 577,000. ^[3]

We forecast the company’s adjusted EBITDA to grow at 27% through 2016, which is at a slightly slower rate than its revenue growth. The resulting EBITDA margin could compress by over a percentage point to around 51%. This is mainly due to the fact that Alibaba is currently operating at a loss on all its non-commerce divisions. Alibaba is investing heavily 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. As a result, Alibaba’s operating profit margin has declined on a year-over-year basis in each of the previous two years as the company has acquired new businesses and invested in developing newer platforms. This trend could continue over the next couple of years since the near-term pressure on EBITDA margins is expected to sustain due to increased investments. However, the company has a marketplaces model and has a huge potential to scale up its cloud offerings. This could help the company maintain relatively low variable costs in the long run, which would imply that its operating leverage will remain high in the long run.

See Our Full Analysis For Alibaba

Read more on Alibaba:

• Where Will Alibaba’s Cloud Computing Growth Come From In The Next Five Years?
• Amazon Vs. Alibaba: Cloud Computing & Infrastructure Growth

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1. Alibaba Group Will Announce September Quarter 2016 Results on November 2, 2016, Alibaba Press Release, October 2016 [↩]
2. Alibaba Q4’16 6-K Filings, SEC, May 2016 [↩]
3. Alibaba Q1 2017 Earnings Call Transcript, Seeking Alpha, August 2016 [↩]