Please ensure Javascript is enabled for purposes of website accessibility

Did Alibaba Just Prove the Bears Wrong?

By Leo Sun - Aug 16, 2019 at 9:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Alibaba's latest earnings report shows Chinese consumers are still doing plenty of shopping online.

Shares of Alibaba (BABA -5.46%) recently rose after the Chinese tech giant posted its first-quarter numbers. Its revenue jumped 42% annually to 114.9 billion RMB ($16.7 billion), topping estimates by $880 million.

Its adjusted net income surged 54% to 30.9 billion RMB ($4.5 billion), or $1.83 per ADS, which also beat expectations by $0.34. That earnings beat looked solid, but will it give Alibaba enough momentum to rally amid concerns about the U.S.-China trade war and tariffs?

Alibaba's offices in Hangzhou.

Image source: Alibaba.

The core commerce business remains robust

Alibaba's core commerce revenue grew 44% annually to 99.5 billion RMB ($14.1 billion) and accounted for 87% of its top line. Its operating profit also grew by 52% to 35 billion RMB ($5 billion), and it remained the company's only profitable business unit.

Physical goods general merchandise volume (which includes the value of all goods sold across the platform) rose 34% annually at Tmall, its main business-to-consumer marketplace. That growth was fueled by a higher number of customers and higher average spending per customer, which was largely attributed to stronger sales of fast-moving consumer goods, apparel, consumer electronics, and home furnishings.

Stronger sales of those higher-ticket products suggest that Chinese consumer spending remains robust despite the economic slowdown. We saw similar results at Alibaba's top rival (JD -7.03%), which recently reported accelerating revenue growth on stronger sales of electronics and home appliances.

Taobao, its main consumer-to-consumer platform, also expanded into lower-tier cities with a simpler app and referral programs on the mobile payment app Alipay (which Alibaba holds a major stake in). As a result, over 70% of Taobao's growth in annual active customers during the quarter came from "less developed" areas. That effort could widen Taobao's moat against its growing rival Pinduoduo, which sells cheaper generic products to lower-income shoppers.

Solid user growth with an ongoing expansion of its ecosystem

Alibaba finished the quarter with 755 million mobile monthly active users across its Chinese retail marketplaces, marking an increase of 34 million from the fourth quarter.

Alibaba also continued expanding its brick-and-mortar presence with its cashier-less grocery chain Hema, which now operates 150 locations across 17 Chinese cities. That smart retail effort, along with its food delivery platform, tether more businesses to Alipay and Alibaba's other services.

That ecosystem growth widens Alibaba's moat against Tencent (TCEHY -3.67%), which owns Alipay's rival WeChat Pay and is a top investor in's biggest rival Meituan Dianping. Tencent is also a major investor in, which is partnered with Walmart in grocery deliveries.

Alibaba is also reportedly in talks to buy NetEase's (NTES -1.68%) cross-border e-commerce platform Kaola for $2 billion, which could complement the growth of its own cross-border platform Tmall International. Tmall International controlled 32.3% of China's cross-border e-commerce market in the first quarter, according to Analysys, while Kaola claimed a 24.8% share.

Alibaba also continues to expand overseas with Lazada, the largest e-commerce platform in Southeast Asia, where its orders and mobile daily active users both doubled annually. Its international businesses, led by its overseas marketplace AliExpress, also expanded with 29% annual sales growth during the quarter.

Tiny parcels in a tiny shopping cart on a laptop keyboard.

Image source: Getty Images.

But Alibaba's other businesses are still racking up losses

Alibaba's ability to juggle so many expansion efforts and investments at its core commerce business is impressive. However, its two other major businesses -- cloud computing and digital media and entertainment -- remain deeply unprofitable.

Its cloud revenue rose 66% annually to 7.8 billion RMB ($1.1 billion), fueled by both higher numbers of customers and higher revenue per customer. Its operating loss narrowed from 2.1 billion RMB to 1.5 billion RMB ($210 million), but it won't be profitable anytime soon. Alibaba Cloud remains the top cloud platform in China, but it faces growing competition from Tencent Cloud, which tethers businesses to its WeChat, QQ, and other services. Therefore Alibaba doesn't have much room to expand the unit's margins with price hikes.

Its digital media revenue rose 6% annually to 6.3 billion RMB ($900 million), and its operating loss narrowed slightly from 4.3 billion RMB to 3.2 billion RMB ($450 million). I've repeatedly argued that Alibaba should consider spinning off this unit for two reasons: Youku Tudou and Alibaba Music are distant underdogs in the streaming video and music markets, respectively, and Alibaba Pictures' movies are high-risk investments with unpredictable returns.

Alibaba's operating losses at those businesses are ugly, but they're offset by the strong profitability of its core commerce business. This balance makes it the exact opposite of Amazon, which supports its lower-margin marketplaces with its higher-margin cloud business.

So will Alibaba rally higher?

Alibaba trades at 20 times forward earnings, which is cheap relative to its earnings growth. However, investors are likely wary of this stock due to trade war jitters and the depreciation of the yuan against the dollar. But as I said before, Alibaba is still one of the best long-term plays on China. Investors who ride out this near-term volatility could be well-rewarded within a few years.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
$82.47 (-5.46%) $-4.76
NetEase, Inc. Stock Quote
NetEase, Inc.
$95.41 (-1.68%) $-1.63
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
$42.04 (-3.67%) $-1.60, Inc. Stock Quote, Inc.
$49.58 (-7.03%) $-3.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.