Alibaba (BABA) shares are climbing higher today on the back of its quarterly earnings report that delivered year over year revenue growth of more than 60% with double-digit gains across its core commerce, cloud computing, digital media and innovation businesses.
That robust performance, which led quarterly revenue to hit $12.23 billion for the quarter, besting consensus expectations of $12.02 billion. Paired with double-digit earnings before interest, tax, depreciation and amortization (EBITDA) growth is more than overshadowing a $0.02 per share miss on the company's bottom line, which came in at $1.22 per share.
Alibaba has long been heralded as the Amazon (AMZN) of China given its position in digital shopping (84% of revenue) but that's about where the similarities end.
At Alibaba, all the company's operating profit is derived from its core commerce business with the remaining 16% of its revenue stream spread across cloud, digital media and innovation initiatives all offsetting weighing on that profit stream. By comparison, Amazon's Amazon Web Services (AWS) is the company's profit and cash flow secret weapon as I like to call it.
That's the negative, but if we look at the year over year comparisons of the non-core commerce businesses, not only are they growing quickly but year over year Alibaba is shrinking their losses across the board.
In many respects this is similar to one of the key concerns investors once had with Amazon - can it turn a consistent profit? We have seen that for a number of quarters in a row, and investors have removed that objection, which has sent AMZN shares significantly higher over the last several quarters.
With Alibaba, the question is not whether those businesses become profitable, but rather when. Yes, much like Amazon, Alibaba continues to invest for future growth as evidenced by the level of capital spending in the June quarter vs. the year ago and declining cash on the balance sheet.
Both of these reflect investments to -- much like Amazon -- move past its core commerce platforms, into physical retail and food-delivery services, as well as expanding its footprint in areas such as logistics and in overseas markets.
That said, the company is benefiting from the continued adoption of what I call the Digital Lifestyle. This is evidenced by the continued growth in both active consumers on its retail marketplace as well as mobile monthly active users. Exiting June, the company's annual active consumers reached 576 million, up nearly 24% year over year, while its mobile monthly active users hit 634 million, up 20% year over year.
Much like Amazon's Prime business, as Alibaba expands its scope of product and services, at least in the near-term, it should continue to win new users and retain existing ones. Also much like Amazon, Alibaba will continue to grab incremental consumer wallet share. The combination should continue to drive top line growth and pull its non-core commerce businesses into the black.
Heading into today's earnings report, consensus EPS for Alibaba this year was $5.97 per share, up from the $4.77 achieved in 2017. Given the overall performance of the June quarter, odds are we could see that expectation move higher but the real focus for investors will be the $7.88 consensus EPS for 2019. What the math shows is an expectation for 28% EPS growth over the 2017-2019 time frame, and against that backdrop BABA shares are trading at a PEG ratio of 0.82 based on 2019 EPS expectations.
In coming months, odds are we will see continued growth in China digital commerce as China consumers build up for the year-end holidays and Chinese New Year. That along with other gains in its cloud and digital media businesses should see Alibaba closing the profit gap leading to not only more comparisons to Amazon, but to multiple expansion that offers upside to $240-$250, if not more.
The one obvious risk is the impact of trade and tariffs between the U.S. and China, which stepped up today. My thinking is given the slowing economic data of late from China and potential mid-term election risk, President Trump could be angling for an October-early November trade win. Not only would that send the overall U.S. stock market higher, but it would remove the trade concerns from BABA shares as well.
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