Alibaba Earnings Preview: Strength In Core Business, New Ventures To Help Sustain Growth

by Trefis Team
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Alibaba (NYSE:BABA) is scheduled to announce its fiscal Q1 2018 earnings on August 17. The company has reported strong year-over-year growth in revenues across segments over the last few years, with recent acquisitions further fueling growth. Alibaba made two high-profile acquisitions last year, which included southeast Asia-based e-commerce company Lazada and online video streaming platform Youku Tudou, that made substantial contributions to Alibaba’s top line growth over the last few quarters. In addition, the company has made significant investments in diverse markets that include two supermarket chains (Sanjang Shopping and Lianhua), a movie production company, a payment gateway, a car technology startup and a biometric authentication technology startup through the course of fiscal 2017. A few months ago, Alibaba announced that it has invested another $1 billion in southeast Asia-based e-commerce company Lazada to take its stake up from 51% to 83%.

Following this announcement at the end of last month, Alibaba’s stock price jumped from $125 to $142. Alibaba’s stock price has rallied by over 100% in the last 18 months, from around $75 in April last year to over $150 currently. This was a result of a sustained period of strong growth across core commerce business segments complemented by additional revenue growth from acquisitions. We have a $118 price estimate for Alibaba, which is over 20% lower than the current market price.

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Solid Outlook For Fiscal 2018

Alibaba’s management has given robust guidance for fiscal 2018, with revenues expected to increase by 45-49%. At the midpoint of the guided range, Alibaba’s net revenues for fiscal 2018 are expected to be around RMB 233 billion ($35 billion). We forecast the company’s adjusted EBITDA margin to be around 60 basis points higher than prior year levels at nearly 48%. In addition, we forecast Alibaba’s non-GAAP diluted EPS for the fiscal year ended March to be almost 40% higher on a y-o-y basis to RMB 32.47, compared to a Reuters’ consensus estimate of RMB 30.77.

Key Growth Drivers For Alibaba

As shown in the table below, Alibaba has reported strong revenue growth across segments. While Alibaba’s core retail e-commerce operations continued to grow at healthy rates, the company reported significant growth from its cloud computing and Digital Media businesses. The Digital Media & Entertainment and International Commerce segments were boosted by the additions of Youku Tudou and Lazada, respectively.

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Cloud computing revenues have grown as a result of an increase in the number of paying customers. The total number of paying customers in the most recent quarter were 70% higher than the previous year quarter at 874,000. 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.

Strong revenue growth in certain segments is complemented by a fall in profit margins due to high initial investment. Alibaba is currently operating at a loss on its non-commerce divisions as the company is investing heavily in 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. Despite a fall in EBITDA margins in FY’17, Alibaba’s diluted non-GAAP EPS was around 40% higher at RMB 23.44 for the full year.

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