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4 Reasons to Buy Alibaba Stock After Its Third-Quarter Earnings

By Leo Sun - Feb 15, 2020 at 9:30AM

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The Chinese tech giant’s post-earnings pullback won’t last forever.

Alibaba's (BABA 0.30%) stock dipped slightly after the Chinese tech giant posted its third-quarter earnings on Thursday. Its revenue rose 38% annually to 161.46 billion yuan ($23.19 billion), clearing estimates by 5.5 billion yuan. Its non-GAAP EPS surged 49% to 18.19 yuan per ADS ($2.61), which also beat expectations by 2.49 yuan.

Alibaba's headline numbers looked solid, but its stock dipped after CEO Daniel Zhang warned that the coronavirus outbreak was throttling its e-commerce orders and food deliveries, and that its business segments that sold physical goods would likely post revenue declines during the fourth quarter.

That warning wasn't surprising since the virus (officially known as COVID-19) running rampant across China and parts of Asia hasn't been contained yet. Yet Alibaba's massive business -- which includes China's largest digital advertising, e-commerce, and cloud platforms -- should also weather those near-term challenges. Why? There are four simple reasons investors should still buy Alibaba's stock on its post-earnings pullback.

Alibaba's campus in Hangzhou.

Image source: Alibaba.

1. Alibaba's core commerce business is still growing

Alibaba's core commerce revenue rose 38% annually during the quarter and accounted for 88% of its top line. Within that total, its Chinese commerce revenue -- which comes from Taobao, Tmall, its Hema Supermarkets, and other smaller marketplaces -- grew 36%.

Annual active customers on its Chinese retail marketplaces rose by 18 million year-over-year to 711 million. Total mobile monthly active users (MAUs) for those marketplaces also grew by 39 million to 824 million. Those growth rates indicate that it isn't losing shoppers to rivals like JD.com (JD -3.13%) and Pinduoduo (PDD -0.08%).

However, Alibaba's core commerce business is still increasingly dependent on its lower-margin "other" revenue, which includes brick-and-mortar stores and direct sales platforms. As a result, the segment's adjusted EBITA margin decreased from 45% to 41%. That decline isn't ideal, but it was likely required to widen Alibaba's moat against its rivals.

The core commerce unit remains Alibaba's only profitable unit, and it continues to use those profits to subsidize the growth of its cloud, digital media, and innovation initiatives businesses.

2. Alibaba Cloud inches toward profitability

Alibaba's cloud revenue surged 62% and accounted for nearly 7% of its top line. It attributed that growth to robust demand for its public and hybrid cloud businesses, and indicates that it remains far ahead of Tencent (TCEHY -0.05%) in China's cloud market.

Alibaba Cloud remains unprofitable, but its adjusted EBITA margin improved from negative 4% a year ago to negative 3%. That progress is encouraging and suggests that economies of scale are kicking in as it leverages its dominance of China's cloud infrastructure market to expand into overseas markets.

It also suggests that Alibaba might stop subsidizing the growth of its cloud business with its core commerce business in the future.

3. Better financial discipline at its money-losing segments

Alibaba's sprawling digital media and entertainment segment -- which consistently burned cash with its money-losing streaming media, film production, online search, and gaming businesses -- has consistently been a sore spot for the company.

However, the unit's adjusted EBITA margin narrowed from negative 93% to negative 45%, and its revenue grew 14% and accounted for 5% of its top line. This unit won't turn a profit anytime soon, but the narrower loss indicates that Alibaba isn't recklessly expanding its ecosystem simply to spite Tencent, Baidu (BIDU -0.65%), and other major tech rivals.

The innovation initiatives segment grew its revenue 40% annually and accounted for 1% of Alibaba's top line. However, the segment remained deeply unprofitable: Its adjusted EBITA margin only narrowed slightly from negative 120% to 100%. That whopping loss was likely caused by Alibaba's ongoing smart speaker war with Baidu, in which both companies sold their devices at losses to tether users to their ecosystems.

A couple uses a smart speaker at home.

Image source: Getty Images.

Alibaba can afford to keep subsidizing those businesses so long as Taobao, Tmall, and its other e-commerce businesses keep generating higher-margin revenue and profits. However, the narrower losses during the quarter indicate that Alibaba is running a tighter ship as it faces tougher headwinds like the economic slowdown in China, the unresolved U.S.-China trade war, and the coronavirus outbreak.

4. The stock is still cheap

Alibaba's stock has more than tripled since its IPO in late 2014, but analysts still expect its revenue and earnings to rise 30% and 21%, respectively, next year. Those are impressive growth rates for a stock that trades at just 25 times forward earnings.

Macro concerns are currently weighing down Alibaba's stock, but those headwinds will eventually fade. I believe Alibaba still has plenty of room to run over the next few decades, so investors should accumulate some shares after its post-earnings slump.

Leo Sun owns shares of Baidu, JD.com, and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu, JD.com, and Tencent Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$91.11 (0.30%) $0.27
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$135.52 (-0.65%) $0.88
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$37.79 (-0.05%) $0.02
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$57.00 (-3.13%) $-1.84
Pinduoduo Stock Quote
Pinduoduo
PDD
$47.63 (-0.08%) $0.04

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

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