BABA Stock: This Is Why the Bears Are Wrong on Alibaba Group Holding Ltd

BABA StockAlibaba Group Holding Ltd (NYSE:BABA) shot the lights out last quarter, but Mr. Market wasn’t impressed.

Shares of BABA stock were flat last week, despite posting great numbers in its earnings report. The situation is so nutty, people with peanut allergies should probably not read this article.

Forget the bears. Those willing to dig beneath the headlines read a spectacular report. I suspect savvy investors who have spotted this gap could make huge profits in the weeks ahead.

Let me explain…

Alibaba crushed expectations last quarter.

Revenue increased 32% year-over-year to $5.33 billion, beating analysts’ estimates of $5.11 billion. Net income more than doubled year-over-year to $1.9 billion. Excluding one-time items, adjusted earnings came to $0.99 per share; the Street wasn’t even close, given analysts were expecting $0.89 per share. (Source: “Alibaba Group Announces December Quarter 2015 Results,” Alibaba Group Holding Ltd, January 28, 2016.)

As you dig deeper, the report gets even better. Annual active buyers surpassed 400 million, up 21 million from the prior quarter. Mobile monthly active users hit 393 million in December, up 47 million from the prior quarter.

Gross merchandise volume (GMV) for the quarter totaled $149 billion, a 23% increase year-over-year. Moreover, as consumers continue to shift to using their smartphones for shopping, mobile GMV counted for 68% of total sales.

More of that money is translating to the bottom line, too. Alibaba’s monetization rate represents the commission charged to sellers on each transaction. Last quarter, this figure reached 2.98%, a big improvement from the 2.7% figure reported one year ago.

Alibaba’s success comes from the relationship between its sellers and buyers on its platform. Sellers are building relationships with consumers. They’re hoping for repeat purchases and brand loyalty, rather than one-time sales. Once the relationship gets established, neither sellers nor buyers would want to move.

Don’t overlook this. Stickiness is something most analysts miss. Once vendors are attached to the platform, Alibaba can easily raise fees and crank out better margins.

Of course, the king of the hill tends to get under a lot of scrutiny. As the big dog in China, Alibaba is under the microscope as well. Critics worry competition from rivals like JD.com Inc (ADR) (NASDAQ:JD) could eat into margins.

They might have a point. JD.com has the upperhand when it comes to shipping. Because the company owns its logistics service, orders can be processed faster.

But Alibaba is catching up. Last August, the company spent $4.5 billion to buy a stake in Chinese electronics retailer Suning Commerce Group. Suning’s network is impressive, with thousands of distribution centers across the country.

The bears don’t understand this deal. Suning’s logistics network would be joined with Alibaba’s logistics affiliate, cutting Alibaba’s processing times. This will further boost the company’s competitiveness against rivals. (Source: “Alibaba and Suning Commerce Enter Into Strategic Alliance,” Alibaba Investor Relations, August 10, 2015.)

The Bottom Line on BABA Stock

Forget the skeptics. The BABA stock bears continue to fret over a Chinese slowdown. They’ll use any excuse to dump shares.

But for those digging beneath the headlines, there was a lot to like in this report. Patient holders of Alibaba stock will likely be rewarded.