China-based e-commerce titan Alibaba Group (NYSE:BABA) absolutely crushed its first-quarter earnings report. Sales rose 53% year over year to $7.4 billion, adjusted earnings jumped 58% to $1.17 per share, and both figures exceeded Wall Street's estimates of $7.2 billion and $0.92 per share, respectively. Share prices have gained 7% since the report, adding to an 82% return over the last 52 weeks.
Following that stellar earnings release, Alibaba's management also held an informative conference call with financial analysts. Here are three of the most important takeaways from that call.
1. A success years in the making
Here's how Executive Vice Chairman Joe Tsai began the earnings call:
I wanted you to know that these exceptional results did not come from anything specific we did during the quarter. The reason we were able to deliver these results is that we sowed the seeds years ago by investing in technology, by investing in innovation, by investing in people and by being bold with a vision that nobody thought was possible. Today, the Alibaba economy is self-reinforcing and it is as strong as ever.
This company isn't chasing short-term wins to impress investors. Instead, Alibaba invests in growth engines for the long run. Eleven percent of revenue is funneled into research and development efforts, on par with innovators like Netflix and IBM.
That's how you build a business for the ages. The company has been in business for 18 years now, but is still growing like a brand-new upstart.
2. Greenfield growth opportunities
Tsai further commented:
The retail segment in China is about a $5 trillion economy in value. Fifteen percent of e-commerce still leaves 85% of retail that is offline. Whether this is just something to look at or presents tremendous opportunities for us depends on our ability to innovate. Our goal is not to simply ride the wave of converting purchases from offline to online.
Our new retail strategy is an invention that anticipates and catalyzes changes in consumer behavior where time, place and method of purchase and consumption will be different from what we were used to before. In this new world of consumption expectations, the distinction between online and offline would disappear.
Alibaba is already a huge retail presence in China, but there is plenty of untapped growth left to explore. Tsai also offered some visions of how online retail could play a larger part in the daily life of Chinese consumers.
"Imagine a store where you can pick items from the shelf and then at the same time purchase other items not from the shelf, but from your mobile phone, and then you tell the store to send everything you just bought to your home because you need to go to catch a movie," he said. "That's the kind of spontaneity, convenience and speed that modern-day consumers are going to expect and Alibaba is setting the standard for fulfilling this high expectation."
3. Cloud computing is set to soar
CFO Maggie Wu remarked:
Our cloud computing business enjoys first-mover advantage, and we'll keep expanding our market leadership by continuously providing value-added services. Our technology advantage and the team's strong execution have strengthened our market position as reflected in expanding customer reach spanning many industries, deepening existing customer relationships and increasing adoption of innovative and value-added products by customers.
In the future, we will see more and more synergies between digital media and entertainment and our core commerce business that complement each other in terms of consumers, content and commercialization. We have seen early success and we'll continue to leverage the cross-selling opportunities between the two businesses presented by the vast consumer base of our ecosystem to drive long-term value.
Alibaba's cloud computing services are collecting more than $1 billion in annual sales today, serving 1 million paying customers. That's still far smaller than Amazon.com's (NASDAQ:AMZN) Amazon Web Services, where the annual revenue run rate stands at $16 billion right now. But Alibaba's cloud computing revenues doubled year over year in the second quarter while Amazon's annual cloud growth has slowed down to "only" 41%.
For Amazon, cloud services have become the company's most profitable segment. Alibaba's cloud segment is still unprofitable, but climbing closer to the breakeven point with each passing quarter. If Amazon's example is any indication of the market value in large-scale cloud computing services, Alibaba should reap plenty of profits from this division over the long haul.