Alibaba’s Year In Review: Strong Revenue Growth Across Segments

Similar to many large internet companies, Alibaba (NYSE:BABA) has had a strong year with its stock price nearly doubling. A strong set of results led to the surge in its stock price, driven by revenue growth across segments. The company reported roughly flat EBITDA margin over the comparable prior year period despite significant investment (in terms of operating expenses) in fast-growing businesses such as digital media & entertainment, cloud computing, and other innovation initiatives. Since many of these businesses are currently loss making businesses, sustaining high margins through the year has been a strong positive for Alibaba this year.

Alibaba’s net revenue was up nearly 60% y-o-y to RMB 144 billion (approximately $22 billion) through the first three quarters of the year. 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. Adjusted operating income was also up 57% y-o-y to RMB 67 billion ($10 billion) with EBITDA margin remaining flat over the prior year period at just over 46%. Non-GAAP earnings per ADS rose nearly 70% on a year-over-year basis to RMB 20.64 ($3.13).

Sustained Revenue Growth Across All Segments

Alibaba has reported a sustained period of high growth across its segments, despite a large base factor for core e-commerce segments. As shown in the table below, Alibaba’s combined retail and wholesale e-commerce business in China was up by a massive 54% on a y-o-y basis to RMB 107 billion ($16 billion). In the most recent 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. The increase of smartphone and high-speed internet penetration has been a key factor that helped drive revenues in core commerce business across China.

International e-commerce segment was boosted by the addition of Singaporean e-commerce giant Lazada to Alibaba’s Southeast Asian operations in recent quarters. Resulting in international e-commerce revenues rose 76% over the comparable prior year period to RMB 13 billion ($2 billion). 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 7.6 billion through the three quarters of the year. 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 most recent 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.

Similarly, digital media and entertainment revenues combined were up 62% to nearly RMB 13 billion, with online video streaming platform Youku Tudou largely driving revenue growth. Alibaba competes with Baidu (NASDAQ:BIDU) iQiyi, and Tencent Video in the fast-growing Chinese online video streaming market. 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.

Positive Guidance For FY 2018

Alibaba expects net revenues to increase by 49-53% through fiscal 2018 ended March. We forecast the company’s adjusted EBITDA margin to be over a percentage point higher than prior year levels at 48.4%. In addition, we forecast Alibaba’s non-GAAP diluted EPS for fiscal year 2018 to be almost 40% higher on a y-o-y basis to RMB 32.47, compared to a Yahoo Finance consensus estimate of RMB 33.72 ($5.11).

We have a $136 price estimate for Alibaba, which is lower than the current market price. Alibaba’s stock price has rallied by nearly 100% in the year thus far, from under $90 at the beginning of the year to $175 currently. You can modify the interactive charts in this note to gauge how a change in individual drivers can affect our price estimate for Alibaba.

See our complete analysis for Alibaba

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