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Bull of the Day: Alibaba (BABA)

Benjamin Rains

Alibaba (BABA) easily topped our quarterly estimates last week, with sales up 42% amid the ongoing U.S. and China trade war. The Chinese e-commerce powerhouse’s stock price has been volatile during the past two years. But Alibaba looks strong as it prepares to enter a new era, with billionaire founder Jack Ma set to step down as chairman soon.

Quick June Quarter Overview

Alibaba’s revenue surged 42% from the prior-year quarter to 114.9 billion yuan, or $16.58 billion, which topped our Zacks Consensus Estimate. Investors should note that Alibaba reports its metrics in Chinese RMB and then offers a comparable U.S. dollar equivalent for the “convenience of the reader.”

The company posted first-quarter fiscal 2020 earnings of $1.83 per share. This crushed our $1.50 estimate and marked a 56% climb from the year-ago period.

BABA’s annual active consumers on its retail marketplaces reached 674 million, up 20 million from Q4 2019 and 98 million from the year-ago period. On top of that, and perhaps more importantly, mobile MAUs on its China retail marketplaces reached 755 million in June 2019, an increase of 34 million over March 2019 and a whopping 121 million above Q1 2019.

 

 

 

 

The Basics

Alibaba operates the two largest e-commerce platforms in China, Taobao and Tmall, which led to its core commerce business accounting for 87% of total Q1 sales. But like its U.S. counterpart Amazon (AMZN), Alibaba has expanded its cloud computing business in recent years.

BABA’s cloud computing unit saw its sales soar 66% to make up 7% of total revenue. Plus, Executive Vice President Joseph Tsai last week said that Alibaba’s cloud segmented is set to profit from the 5G transition.

Along with cloud computing and e-commerce, Alibaba operates a digital media and entertainment business, which accounted for 5% of total quarterly revenue. Investors should also note that Alibaba and Salesforce (CRM) in late July announced a partnership. “Alibaba will become the exclusive provider of Salesforce to customers in mainland China, Hong Kong, Macau, and Taiwan, and Salesforce will become the exclusive enterprise CRM product suite sold by Alibaba,” Salesforce wrote.

Alibaba reportedly holds about two-thirds of the e-commerce market share in the world’s second-largest economy. The company has also beefed up its logistics business as its core Chinese marketplaces, such as Beijing and Shanghai, become more saturated. The firm said that 70% of its new customers in the past quarter live in less-developed areas.

Alibaba’s ability to expand its reach to more of the country’s roughly 1.42 billion people will prove vital going forward. Clearly, U.S.-China trade war fears still linger over the firm. But Alibaba just proved that the fight hasn’t hurt the company as much as some on Wall Street might have assumed.

 

 

 

 

Outlook & Earnings Trends

Moving on, our current estimates call for Alibaba’s quarterly revenue to jump 35.7% to reach $16.82 billion. The company’s full-year fiscal 2020 revenue is then projected to climb 32% from roughly $56 billion to $73.46 billion. Peeking further ahead, the company’s 2021 sales are expected to climb 31% above our current-year estimate to reach $96.62 billion, in a sign of strong and stable top-line expansion.

At the bottom end of the income statement, BABA’s adjusted quarterly earnings are expected to climb 11.3% to $1.56 per share. Alibaba’s full-year fiscal 2020 EPS figure is then expected to surge nearly 26%, with 2021 projected to come in 25% higher than our current-year estimate.

Alibaba has easily topped our earnings estimates in the trailing four periods, by a 19% average. Furthermore, BABA’s earnings estimate revision activity has moved in the right direction following its recent earnings release, especially for the current quarter and fiscal year. 

 

 

 

 

Bottom Line

Alibaba is a Zacks Rank #1 (Strong Buy) at the moment that also holds a “B” grade for Momentum in our Style Scores system. The firm’s top-line growth is expected to slow down on a percentage basis, which is to be somewhat expected as its overall sales reach eye-popping totals.

The Chinese e-commerce power has, of course, diversified and cloud computing could help prove to be a catalyst for expansion into other areas, much like it has been for Amazon. We should also note that shares of BABA rest roughly 11% below their 52-week high, which could give them some room to run.

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