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Alibaba Is Shaping Up Nicely

- By Sangara Narayanan

Alibaba Group Holding Ltd. (BABA), the Chinese e-commerce giant and Amazon (AMZN) clone, has come a long way from its 2016 bottoms, but the stock price is still barely above the price levels it touched at the end of its first trading day in September 2014. The stock was grossly overvalued at the time of its initial public offering, causing the stock to move sideways for more than two years.

But from a revenue growth perspective, Alibaba has been done really well - if not great - as it has kept its strong double-digit growth intact for the last several years. The best part about Alibaba's growth is that it managed to increase annual revenues by 32.73% during 2016, and continues to post strong quarterly growth numbers despite a slowdown in the Chinese economy.


For the third quarter, Alibaba posted a 54% increase in revenues compared to last year and revised its 2017 full-year guidance for revenue growth to 54%, up 6% from the previously expected 48%. The upward revision was possible because of Alibaba's efforts in cloud computing and digital media, which have yielded triple-digit rates and continue to provide a nice boost to the company's top line.

Key third-quarter numbers

  • Revenue was 53,248 million yuan ($7,669 million), an increase of 54% year over year.
  • Revenue from core commerce increased 45% year over year to 46,576 million yuan.
  • Revenue from cloud computing increased 115% year over year to 1,764 million yuan.
  • Revenue from digital media and entertainment increased 273% year over year to 4,063 million yuan.
  • Revenue from innovation initiatives and others increased 61% year over year to 845 million yuan.

Revenues from outside its core e-commerce operations hit $961 million during the third quarter, against $6,708 million from core commerce. The good news is non-core revenues now account for nearly 12.5% of its overall revenues and are growing at triple-digit rates.

Currently, these segments may not be in a position to completely offset a slowdown in core e-commerce numbers, should that happen, but it will certainly provide a lot of support to keep its double-digit growth continuing for some more time. In addition, it will offer some balance to its e-commerce based revenues.

Alibaba is still trading around 12 times sales, much higher than the level commanded by Amazon. At the current level, a lot of its future growth is priced in. This means investors need to remain cautios about investing in Alibaba since the sideways movement may continue until the sales multiple settles at a reasonable level.

Although Alibaba is a good company that can provide great exposure to the Chinese market, buying the stock at the dips is the best way to enter. Otherwise, returns are going to be hard to come by.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.