BABA Stock: 3 Takeaways from Alibaba Q4 Earnings Report

Alibaba Q4 Earnings Report
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BABA Stock Price Drops on Q4 Earnings

On Friday, shares of Alibaba Group Holding Ltd (NYSE:BABA) dropped more than one percent after the Alibaba Q4 earnings report came out, sucking more than $4.0 billion out of Alibaba’s market capitalization.

If you’re wondering why, we’ve got you covered.

But first, a little context.

This isn’t any old Alibaba earnings report date. It’s Alibaba’s first quarterly review since President Donald Trump started a trade war with China, meaning that investors will use it as a bellwether for China’s technology sector.

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So, you’ll probably hear a lot of “big picture” statements in the next few days.

Financial pundits will blabber on about the global effects of Trump’s foreign policy and what it means for China’s liberalization at home. Blah blah blah. What does it mean for the average investor? That’s what you need to know.

To figure that out, we dug into the earnings report. (Source: “Alibaba Group Announces March Quarter 2018 Results and Full Fiscal Year 2018 Results,” Alibaba Group Holding Ltd, May 4, 2018.)

Here’s a snapshot:

  • Quarterly revenue increased 61% year-over-year.
  • Alibaba added 37 million customers over the last year.
  • All of those customers joined on smartphones.
  • Operating cash flow is positive at $2.26 billion.
  • Net income was roughly $1.06 billion.

Also, you might be interested in Alibaba’s revenue breakdown. Here’s how much the company grew per segment:

  • Cloud computing led the gains with 103% growth.
  • Core commerce followed at number two with 62% growth.
  • Entertainment & digital media advanced a respectable 34%.
  • Innovation & venture capital only grew eight percent.

Do with these numbers what you will. From where I’m standing though, there are only three things that accurately tell the story of Alibaba Q4 earnings: share-based compensation (bad), operating margins (mixed), and changes in revenue composition.

Key Numbers in Alibaba Q4 Earnings Report

Investors are worried about Alibaba’s spending habits. As part of its global expansion plan, the company doled out fistfuls of cash during the last year, buying up subsidiaries and investing in new data centers.

Some view that as smart and aggressive; others as reckless and irresponsible.

Whatever your perspective, these are the factors to watch:

The Hidden Cost of Acquiring Ant Financial

You probably knew that Alibaba’s acquisition of Ant Financial Services Group would squeeze earnings, but you should look beyond the headline figure to stock-based compensation. There’s a ton of it in the deal.

As a result, rising Alibaba stock prices drove stock-based compensation up 33%, making the deal that much more expensive. And according to the Alibaba earnings report, that “share-based compensation expense will likely increase” over the next year, meaning the hidden costs of Ant could continue to rise.

The company tried to mollify investors by saying “any such increase will be non-cash and will not result in any economic cost or equity dilution to our shareholders.” Okay. But if you had persuaded Ant’s negotiators that BABA stock was going to keep rising, maybe the deal would have cost less to begin with. (Source: Ibid.)

The Sudden Drop in Operating Margins

Investors’ concerns over spending were (somewhat) validated. Alibaba’s operating margin fell three percent for the quarter, cutting into the firm’s “take home profit.” This led to a decrease in year-over-year profit that I’m sure you’ll hear a lot about.

I consider this a mixed bag. Yes, Alibaba did eat into its own profitability. Is that temporary? We have no idea. It’s possible that Alibaba might, like Amazon.com, Inc. (NASDAQ:AMZN), be sacrificing some short-term profits in order to win long-term pricing power. Only time will tell.

Changes in Revenue Composition

In Silicon Valley, tech giants like Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT) are leaning heavily on cloud computing sales. Those areas of business are growing more and more important. By comparison, Alibaba’s “Core Commerce” segment grew its share of revenue by 43%, showing that Alibaba is starting to lean on actual e-commerce sales.

So, even if Alibaba’s is less efficient than it used to be—because of its “New Retail” expansion, “Cainiao Network” consolidation, and “Lazada” investment—at least the company hit its target for retail expansion.

Analyst Take

I’m not happy about the rise in stock-based compensation, but it’s not that important. Sure, it might take a bite out of profits, but it’ll also retain talented executives during a tumultuous period in the company’s global campaign. Not a bad trade, overall.

As for the other two factors—falling margins and changes to revenue—I’m not worried about them either. Both are in service of a long-term vision: One that sees Alibaba on a global stage beside Amazon as the two kings of retail.

And speaking of Amazon, can I point out that BABA stock trades at a much lower P/E ratio? It’s many times cheaper than AMZN stock! Investors looking for great value, sales growth in excess of 50%, and strong expansion plans may want to consider Alibaba stock.