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Alibaba Revenue Slows: What's Next for BABA Stock Amid China's Downturn?

Benjamin Rains

Shares of Alibaba BABA surged over 6% Wednesday despite posting its slowest quarterly revenue growth in three years before the opening bell. The Chinese e-commerce powerhouse did see some impressive overall growth and Alibaba executives tried to calm investor nerves about the economic slowdown in China.

Overview

Alibaba’s quarterly revenues surged 41% from the year-ago period to 117.28 billion yuan or $17.5 billion. The company’s core commerce unit saw its sales soar 40% to $14.958 billion to account for roughly 85% of BABA’s total quarterly revenues. On its face, this top-line growth appears impressive, but it marked Alibaba’s slowest pace since the January through March quarter of 2016.

With that said, Alibaba’s revenues surge 54% last quarter, 61% in the June quarter, and 56% in the December period of last year. The e-commerce firm also warned investors of a slowdown in November when it cut its full-year revenue forecast. Plus, we now know that China’s economy last year expanded at its slowest pace since 1990 as the trade war with the U.S. continues (also read: Breaking Down Apple's Dismal Q1 iPhone & Greater China Revenues).

Investors were likely pleased that Alibaba was able to top quarterly net income and adjusted earnings estimates. This bottom-line beat came as even more of a surprise after at least 20 companies in China warned investors Tuesday that full-year earnings would fall below expectations. Part of its bottom-line growth was attributed to an accounting gain based on the revaluation of a subsidiary.

 

Outlook

Alibaba runs China’s two largest e-commerce platforms, Taobao and Tmall. But Alibaba, like Amazon AMZN, has focused on expansion into new growth areas that could help the firm amid a slowing Chinese economy.

The firm’s cloud computing revenues skyrocketed 84% to $962 million. Meanwhile, BABA’s digital media and entertainment sales surged 20% to reach $944 million. This unit could become hugely important in the age of Netflix NFLX as everyone from Disney DIS to AT&T T races to expand its streaming business.

Maybe more importantly, Alibaba added 35 million annual active consumers on its retail marketplaces in China during the quarter to close with 636 million. Plus, the firm’s mobile monthly active users reached 699 million in December 2018, up 33 million above September 2018. CEO Daniel Zhang said on the company’s earnings call that the economic slowdown in China “might cause concerns in the market. However, what we see from Alibaba’s platforms is that Chinese consumption growth is still strong,”

Going forward, spending on big-ticket items will likely continue to decline in China, according to analysts. But Alibaba said that it has seen sustained demand for home furnishings, apparel, cosmetics, and other faster-moving consumer goods. The company has also expanded into overseas markets, bricks-and-mortar retail, and food-delivery, which includes working with the likes of Starbucks SBUX.

Looking ahead to the following fiscal year, Alibaba’s revenues are projected to climb 35.46% above our current year Zacks Consensus Estimate to reach $74.69 billion. At the bottom end of the income statement, BABA’s adjusted full-year earnings are expected to surge 23.60%.

Bottom Line

Alibaba is currently a Zacks Rank #3 (Hold) based on its recent earnings estimate revision activity. Meanwhile, BABA stock rested up roughly 6% through late afternoon trading Wednesday at $166.54 a share. This marked a roughly 21% downturn from its 52-week high of $211.70 per share.

Therefore, Alibaba has plenty of room to run despite its post-earnings climb. And with giants like Facebook FB, Apple AAPL, and even Amazon set to see their growth slow, BABA stock might become more attractive.

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