Please ensure Javascript is enabled for purposes of website accessibility

Alibaba Remains an Undervalued Growth Stock

By Leo Sun – Nov 4, 2019 at 4:10PM

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

The latest earnings report shows that U.S.-China trade war jitters aren’t hurting the tech giant’s commerce and cloud businesses.

Alibaba (BABA -1.16%), the biggest e-commerce and cloud player in China, late last week reported its second-quarter earnings. Its revenue rose 40% annually to RMB 119.02 billion ($16.65 billion), beating estimates by $180 million.

Its GAAP net income, which included a big one-time gain from its increased stake in the fintech company Ant Financial, surged 288% to RMB 70.75 billion ($9.9 billion), or $3.85 per share. On a non-GAAP basis, which excludes that gain, stock-based compensation, and other one-time charges, its net income rose 40% to RMB 32.75 billion ($4.58 billion), or $1.83 per share, which beat expectations by $0.32.

Alibaba's stock briefly popped after the report, but subsequently gave up most of those gains, presumably due to ongoing concerns about the U.S.-China trade war and the economic slowdown in China. Should long-term investors consider starting a position in this tech titan even as the bulls remain on the sidelines?

Alibaba's office in Hangzhou.

Image source: Alibaba Group.

The core commerce business is still a powerhouse

Alibaba's core commerce revenue rose 40% annually to RMB 101.22 billion ($14.4 billion), or 85% of its top line. Its operating profit climbed 32% to RMB 32.07 billion ($4.56 billion), retaining its position as Alibaba's only profitable business.

Mobile monthly active users (MAUs) across its Chinese retail marketplaces (mainly Taobao and Tmall) rose 18% annually to 785 million, as annual active consumers (over the past 12 months) grew 15% to 693 million. That puts it far ahead of its rival (JD -1.15%), which ended last quarter with 321 million annual active customers.

Taobao's daily active user (DAU) growth on its mobile app accelerated over the past six months as its traffic grew organically and it bolstered user engagement with new features. Tmall's GMV (gross merchandise volume), or the value of all goods sold across its platform, rose 26% annually on robust sales of fast-moving consumer goods and consumer electronics, which allays some fears about the Chinese economy's slowdown throttling online spending. It also recently acquired NetEase's Kaola to expand its cross-border e-commerce platform.

Tiny parcels on a laptop keyboard.

Image source: Getty Images.

Moreover, Alibaba continues to expand its brick-and-mortar footprint by tethering its Hema cashless supermarkets and other stores to Ant Financial's Alipay platform. That strategy widens its moat against Tencent's (TCEHY -2.06%) WeChat Pay, which shares a duopoly with Alipay in China's digital payments space.

It continues to beef up its logistics capabilities with its investment in Cainiao's delivery network, and it remains focused on expanding its Southeast Asian presence with its subsidiary Lazada, which more than doubled its orders annually during the quarter. Alibaba also reiterated its goal of reaching over a billion global shoppers by the end of 2024, and it continues to expand into new markets like India, Russia, and Europe.

The cloud business boosts Alibaba's revenue -- at a price

Alibaba's cloud revenue surged 64% annually to RMB 9.29 billion ($1.32 billion), or 8% of its top line. It attributed that growth to higher average revenue per customer, which allays some fears about a pricing war with aggressive rivals like Tencent Cloud.

However, its operating loss widened from RMB 1.17 billion ($170 million) to RMB 1.93 billion ($270 million). It attributed that drop to higher investments in its infrastructure and talent, indicating that Alibaba intends to keep subsidizing the growth of its cloud platform with its core commerce profits. That's notably the opposite strategy as Amazon's, which usually offsets the weaker margins of its marketplace unit with its higher-margin cloud platform business.

The other businesses are still losing money

Alibaba's digital media and entertainment revenue rose 23% annually to RMB 7.3 billion ($1.04 billion), but its operating loss only narrowed slightly from RMB 4.8 billion ($680 million) to RMB 3.3 billion ($470 million).

This unit (which includes its streaming media platforms, movie production studio, web browser, and other non-core businesses) remains a money pit, but Alibaba likely considers it a suite of necessary defenses against Tencent, which is expanding its sprawling ecosystem into the same markets.

The innovation initiatives business -- which produces smart speakers, connected car solutions, and other side bets -- grew its revenue 14% annually to RMB 1.21 billion ($170 million), but its operating loss widened from RMB 2.2 billion ($310 million) to RMB 3.1 billion ($440 million). It attributed that wider loss to higher investments in tech research and newer projects, which also widen its moat against Tencent and other Chinese tech giants.

Still a great growth story at a low valuation

Alibaba didn't provide exact guidance for the third quarter, but CFO Maggie Wu stated that its revenue growth would be in the "30-ish" percent range. Analysts currently expect Alibaba's revenue and earnings to rise 32% and 24%, respectively, this year.

They expect that momentum to continue with 29% sales growth and 26% earnings growth next year, which are stellar growth rates for a stock that trades at just 20 times forward earnings.

In short, Alibaba's growth indicates that fears about the Chinese slowdown are overblown, that it remains heads and shoulders above the competition, and that it can keep leveraging the growth of its higher-margin marketplace to expand its ecosystem.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon,, and Tencent Holdings. The Motley Fool owns shares of and recommends Amazon,, NetEase, and Tencent Holdings. The Motley Fool has a disclosure policy.

Premium Investing Services

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