Alibaba Earnings Preview: Robust Revenue Growth Expected Across Segments

Alibaba (NYSE:BABA) is scheduled to announce its fiscal Q3 2018 earnings on February 1. The e-commerce giant has reported strong year-over-year growth in revenues across segments over the last few years, with recent acquisitions further fueling growth. Alibaba’s impressive performance across segments and the company’s forays into multiple markets have had a positive impact on shareholders, which led its stock price to rally last year. The positive sentiment has continued this year, with Alibaba’s stock price surging over 15% in the last month. We have created an interactive analysis where you can change expected revenue and EBITDA margin figures for Alibaba to gauge how it will impact expected EPS for FY’18.

Key Growth Drivers

Alibaba made two high-profile acquisitions last year, which included southeast Asia-based e-commerce company Lazada and online video streaming platform Youku Tudou, which made substantial contributions to Alibaba’s top line growth over the last few quarters. E-commerce is a booming business, particularly in fast-growing markets in the Asia-Pacific region. Alibaba has strengthened its hold in this region, particularly with Lazada’s Southeast-Asian operations under its belt. The addition of Lazada has helped drive international commerce revenues by nearly 90% y-o-y through the first three quarters of 2017.

Even on the domestic front, Alibaba has continued to grow massively. 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, as shown below. The increase of smartphone and high-speed internet penetration has helped drive revenues in core commerce business across China.

Cloud computing revenues have grown as a result of an increase in the number of paying customers. The total number of paying customers 70% higher over the comparable prior year period 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.

Alibaba’s acquisitions and investments are likely to continue to drive revenues across segments in the coming quarters. Although the initial investment could be high for many product lines, the company-wide margins are likely to improve in the long run, given the relatively low variable costs, due to which the company’s operating leverage will remain high. In terms of profits, Alibaba’s adjusted EBITDA has grown at the same pace as revenue growth in recent quarters. Moreover, margins of its loss-making divisions, including cloud computing and innovation initiatives, also expanded in the most recent quarters. While these segments continue to be loss-making segments for now, they could become profitable over the coming years. As a result of significant growth expected across segments, we forecast the company’s adjusted EBITDA margin to be over a percentage point higher than prior year levels at nearly 48%.

See Our Full Analysis For Alibaba

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