Alibaba Earnings Takeaways: Strong Growth Across Segments

Alibaba (NYSE:BABA) announced its fiscal Q3 earnings on January 24, reporting a 54% year-over-year increase in revenues to RMB 53.2 billion. ^[1] The massive revenue growth was similar to results from the March, June and September quarters, with new acquisitions driving much of the top line growth. Alibaba acquired online video streaming platform Youku Tudou in November 2015 and Singaporean e-commerce giant Lazada in April 2016, which drove Digital Media and International Retail Commerce revenues, respectively. Additionally, Alibaba’s core commerce and cloud business continued to grow at a strong pace through the December quarter – similar to the trend observed all year.

We have a revised $99 price estimate for Alibaba’s stock, which is roughly in line with the current market price. Alibaba’s stock price rose from $88 at the end of last year to around $101 currently.

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Strong Revenue Growth Across Divisions

In addition to inorganic growth in Digital Media and International Retail segments, Alibaba reported a massive 115% annual increase in Cloud Computing revenues to RMB 1.8 billion for the December quarter. As a result, full year Alibaba Cloud revenues were up almost 140% y-o-y to RMB 5.6 billion. The growth in revenues was largely due to a more than 100% increase in the total number of paying customers for cloud computing and internet infrastructure offerings from 313,000 customers in September quarter last year to 765,000 this year. ^[2] This number is expected to increase given the huge demand for internet infrastructure across China and other Asian markets. As a result, we expect strong growth in Cloud Computing revenues for Alibaba in the coming years. (Read more: Amazon Vs. Alibaba: Cloud Services In Focus)

Alibaba’s core e-commerce business includes websites Taobao, Tmall and Juhuasua, and has provided consistent growth for the company over the last few years, with revenues growing from RMB 24 billion in 2012 to RMB 75 billion in 2015. This segment witnessed a sustained period of growth, with Q3 FY’17 revenues rising by 42% y-o-y to RMB 42.6 billion. Similarly, full year revenues were up 43% to RMB 112.3 billion (or around $16.5 billion at current exchange rates).

In the December quarter, Alibaba’s online retail segment in China was boosted by an 9% increase in annual active buyers and a 25% increase in mobile monthly active users (MAUs) to 443 million and 493 million, respectively. Additionally, the revenue per buyer (particularly for mobile users) has also surged on a year-over-year basis as shown below.

In terms of operating profits, Alibaba’s adjusted EBITDA grew by 43% year-over-year to RMB 70.1 billion for the year. The rate of growth of operating profit was slightly lower than revenue growth since the company invested heavily in its smaller non-commerce segments. For instance, 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. As a result, the smaller divisions operate at a loss, as shown in the table. While the margins of the loss-making divisions have improved, it could take a year or two for these divisions to become profitable. As a result, the company-wide margins can improve in the long run given the relatively low variable costs, due to which its operating leverage will remain high.

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1. Alibaba Group Announces December Quarter 2016 Results, Alibaba Press Release, January 2017 [↩]
2. Alibaba Q3 FY 2017 Earnings Call Transcript, Seeking Alpha, January 2017 [↩]