ii view: Sales & geopolitical tensions grow at Alibaba

Despite forecast beating sales, shares for this online Chinese retailer fell. Here’s why.  

Fourth-quarter results to 31 March 2020

• Revenue rose by 22% to US $16.14 billion
• Adjusted earnings (EBITDA) up 1% to $3.6 billion

Chief Executive Daniel Zhang said:

“Alibaba achieved the historic milestone of US$1 trillion in gross merchandise volume across our digital economy this fiscal year. Our overall business continued to experience strong growth, with a total annual active consumer base of 960 million globally, despite concluding the fiscal year with a quarter impacted by the economic effects of the Covid-19 pandemic. The pandemic has fundamentally altered consumer behaviour and enterprise operations, making digital adoption and transformation a necessity.

“We are well positioned and prepared to help large and small businesses across a wide spectrum of industries achieve the digital transformation they need to survive this difficult period and eventually prevail in the new normal.”

ii round-up:

Chinese online retailer Alibaba (NYSE:BABA) reported fourth-quarter sales which beat analyst estimates, buoyed by consumers shopping from home under coronavirus lockdowns. 

Sales of 114.3 billion yuan or $16.14 billion exceeded forecasts nearer to 107 billion yuan. 

Alibaba, founded by 18 people and originally led by Jack Ma, generates revenue mainly by selling advertising and promotional services to third-party merchants that list products on its e-commerce sites. 

Active consumers on its Chinese retail marketplaces, such as Taobao and Tmall, grew by 15 million from the previous quarter to 726 million. Mobile active users jumped by 22 million to 846 million. 

Listed on the New York Stock Exchange, Alibaba operates across the four divisions of Core Commerce - by far its biggest sales generator - Cloud Computing, Digital Media and Entertainment and Innovation initiatives.

Earlier this year, management outlined plans to invest 200 billion yuan ($28.3 billion) in its cloud computing division over the next three years as it battles fellow cloud rivals such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL). 

The cloud division accounts for just over one tenth of Alibaba’s overall sales and has to date remained loss making. Cloud computing revenue grew 58% year-over-year to $1.72 billion. 

Alibaba shares fell by just over 4% following the results on Friday. Moves by the US government over recent days which could result in the delisting of Chinese companies like Alibaba now overshadow. 

ii view:

China’s equivalent to US online retailing giant Amazon, Alibaba has made huge progress in its two-decade long history. A new chapter for the company recently commenced as founder Jack Ma passed the leadership reins to Daniel Zhang. 

For investors, exposure to consumers in the world’s second biggest economy is an enticing prospect. A stock market value of around $535 billion trails the $1 trillion plus of Amazon, leaving plenty of room for further potential growth. 

Alibaba continues to make progress. Full-year sales rose by 35% to over $70 billion. But its shares do not come cheap, sat on a forward one-year price earnings ratio of over 200 compared to Amazon’s at around 120. Tensions between the US and China also continue to heighten, with an effective cold war now being talked of. In all, while long term growth still looks likely, some near term caution appears highly sensible. 

Positives

• Exposure to the world’s second biggest economy
• Looking to grow sales outside of China

Negatives

• Chinese companies could be delisted in the US
• Cloud computing is loss making

The average rating of stock market analysts:

Strong buy