ALIBABA BEATS EARNINGS - REASONS TO BUY
The stock of Alibaba is up today (BABA +1%) after reporting better than expected revenue and earnings numbers! Alibaba earned 22 (RMB) per share, compared with 18 (RMB) a year prior (+22%). This figure was better than the 21 (RMB) that analysts were expecting Alibaba to post!
Revenue for the quarter was equally impressive (221B vs 215B expected) rising around 40% from 161B a year ago! Lastly, yet maybe most important was the fact that Alibaba announced that their cloud business has reached profitability after years of running at a loss! Cloud revenue grew a whopping 50% and investors can begin to feel comfortable with Alibaba's opportunity within this industry now that they have proven they can operate at a profit.
Despite these fantastic numbers, the stock has barely moved pre-market as investors remain concerned about upcoming pressure from the Chinese regulator. Therefore this could be a great opportunity to buy shares in Alibaba whilst their fundamentals look increasingly impressive!
Here are 2 REASONS to invest in Alibaba… And a couple of reasons to remain cautious!
THE FUNDAMENTALS LOOK GREAT 👍
After this recent earnings beat, the stock of Alibaba screams “undervalued” compared to their international ecommerce peers in the shape of Amazon, JD.com & Mercado Libre (See below).
Alibaba’s revenues & earnings are expected to accelerate and grow by 47% & 36% this year after receiving an online sales boost caused by the pandemic. Yet given that Alibaba’s stock price has dipped due to the Ant Financial stumble and delisting threats, the stock now has a forward PE ratio of only 22! Alibaba has never traded with a PE below 20 and given that the company expects to grow earnings by an average of 24% per year over the next 5 years, the stock should almost certainly trade higher in future!
In fact, if the stock grew in tandem with its annual earnings growth (24%) over the next couple of years I wouldn’t be surprised!
THE BUSINESS IS BECOMING INCREASINGLY DIVERSIFIED 👍
Alibaba’s ecommerce platform is a lot more PROFITABLE than it’s competitors given that they don’t have any fulfilment centres. Alibaba is more of a website platform that connects buyers and sellers and because of this, their expenses are a lot lower than Amazon and local rival JD.com. Due to these higher gross margins, Alibaba’s ecommerce business is extremely profitable unlike others that still operate at a loss.
Alibaba’s strong financial situation has allowed them to INVEST HEAVILY in various other business ventures which are clearly starting to pay off. Cloud revenue grew 60% year-over-year, Ele.me (Alibaba’s food delivery business) grew revenue 45%, Alipay grew 20% & their SE Asia subsidiary (Lazada) continues to lead within one of the fastest growing ecommerce market in the world!
Chuck in the fact that Alibaba is now the 3rd largest digital ad seller in the world and the company’s revenues look increasingly WELL DIVERSIFIED!
COMPETITION IS GETTING TOUGH! 👎
For years now JD.com has played second fiddle to Alibaba, however analysts are suggesting that the many years of investment that JD.COM has put into building it’s own fulfilment network may start to pay off! Alibaba has been able to use it’s profits to fund growth in other industries however Analysts are suggesting that JD’s end to end infrastructure will give it the edge of Alibaba going forward!
It’s not just JD.com and their growing margins that Alibaba have to worry about. Newer rivals BILIBILI & PINDUODUO are growing rapidly, in fact Pinduoduo is expected to surpass Alibaba in terms of active buyers within the next 12-24 months! Not only is competition heating up in China but the ecommerce market is the most mature in the world and therefore growth is expected to plateau sooner than in Europe, America & Africa!
REGULATORY PRESSURE 👎
The Chinese antitrust regulator recently suspended the IPO of Alibaba subsidiary ANT FINANCIAL as the government aims to halt monopolistic practices by big tech companies. It’s not just the local regulator that Alibaba has to worry about either! The US recently announced that all Chinese companies will have to comply with new auditing rules to avoid being DELISTED from US stock exchanges!
Although it should be easy for companies to merely alter their auditing procedures, Alibaba’s reporting standards have concerned investors for a number of years. If this were to cause an issue and Alibaba were to get delisted, then this would be DISASTROUS for the stock!
Alibaba is at the heart of various growth trends including ecommerce, online advertising, cloud, payments and streaming. Therefore, it’s no surprise that Alibaba is expected to deliver IMPRESSIVE GROWTH for years to come! If all goes to plan, the stock will almost certainly be worth more in future than it is now.
However, there are people out to foil the plan! The US & Chinese regulators appear to want blood… But do they really?
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Disclaimer: All trading involves risk. Only invest money that you can afford to lose and remember that past performance doesn’t guarantee future results. Everything posted by me is for educational purposes only. I am not a financial advisor and no information on this website or any accounts linked with myself should be considered as financial advice. Remember, all trades are at your own risk.