Alibaba’s Stock Has Doubled This Year With Sustained Growth Across Segments

Alibaba (NYSE:BABA) announced its Q2 fiscal 2018 earnings on August 17, reporting a solid 61% year-over-year increase in revenues to RMB 55.1 billion ($8.3 billion). Alibaba has reported similar revenue growth in every quarter in recent years, due to strength in the core commerce businesses as well as the cloud computing and digital media & entertainment segments.

While the margins of the loss-making divisions including cloud computing and innovation initiatives have improved, it could take a few years for all divisions to become profitable. As a result, the company’s adjusted EBITDA grew at a slightly slower pace than revenues, due to which margins compressed by around a percentage point, as shown above.

We are in the process of revising our $136 price estimate for Alibaba, which is around 25% lower than the current market price. Alibaba’s stock price has rallied by over 100% in the year thus far, from under $90 at the beginning of the year to over $180 currently.

See our complete analysis for Alibaba

Sustained Revenue Growth Across All Segments

Alibaba has continued to impress shareholders of late, with a sustained period of high growth across its segments. As shown in the table below, Alibaba’s retail e-commerce business in China was up by a massive 63% on a y-o-y basis to RMB 41.9 billion ($6.3 billion). The company has seen massive growth in this segment in recent quarters despite the large base factor. In the September quarter, Alibaba reported a 22% increase in mobile monthly active users (MAUs) to 549 million, while the revenue per buyer has also surged on a year-over-year basis, as shown below. The increase of smartphone and high-speed internet penetration has helped drive revenues in core commerce business across China.

International e-commerce revenues have been boosted by the addition of Singaporean e-commerce giant Lazada to Alibaba’s Southeast Asian operations in recent quarters. Following impressive performance from Lazada in recent quarters, Alibaba announced in June that it is investing another $1 billion in Lazada to take its stake up from 51% to 83%.

Furthermore, cloud computing revenues almost doubled to RMB 3 billion for the September quarter. Despite cloud computing revenues nearly doubling on a y-o-y basis in each of the last few quarters, this segment has continued to operate at a loss. Alibaba’s management mentioned that the segment’s adjusted EBITDA margins improved to negative single digits in the September quarter. This number is expected to continue to improve in the coming years given the huge demand for internet infrastructure across China and other Asian markets, and economies of scale. Comparatively, digital media and entertainment revenues combined were up just 33% to RMB 4.8 billion, with online video streaming platform Youku Tudou largely driving revenue growth.

Robust Outlook For FY 2018

Alibaba’s management has revised its revenue guidance for fiscal 2018, with revenues expected to increase by 49-53%, compared to around 47% previously. Excluding the impact of Cainao consolidation, revenues are expected to be up by 45-49%, as guided by the company at the end of the previous quarter and in its investor day presentation.

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 Yahoo Finance consensus estimate of RMB 32.35 ($4.88).

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