Alibaba (BABA) reported strong earnings on Wednesday, thanks to steady growth in its core commerce and cloud business.
Alibaba reported 95.3 billion yuan ($13.6 billion) in revenue in the March quarter, beating analysts’ expectation of 91.58 billion yuan ($13.3 billion). Revenue growth hit 51%, a sharp acceleration from last quarter’s growth rate of 41%. Adjusted earnings per share, at 8.57 yuan ($1.25), also beat estimates of 6.5 yuan (94 cents). Alibaba expects revenue to top 500 billion yuan ($72.69 billion) in the fiscal year 2020.
Alibaba CEO Daniel Zhang said the company was able to grow its base to 654 million annual active consumers by extending its penetration in less-developed cities, which contributed to 70% of the net increase of 102 million annual active users in the fiscal year 2019.
The strong growth echos the improvement of the macro conditions in China, when China consumer sentiment has rebounded in the first three months this year, and online retail sales expanded by 21%. Analysts predict that China’s economy is bottoming out. JD.com, Alibaba’s major rival in China, also reported strong earnings growth last week.
“Although we believe that there could be softer margins (and greater losses) in new initiatives (e.g. Ele.me), we also believe that there could be continued strength and resilience in non-commission advertising revenue (CMR),” analysts at Deutsche Bank wrote in April.
Alibaba's aggressive offline investments could shrink medium-term margins but will expand its business to all types of consumption in the Chinese market and lay the foundation for future growth. Meanwhile, to ease some margin pressure, Alibaba is likely to deepen monetization of its users with better ad-sales efficiency and efforts to optimize product-search results. It also remains to be seen how long Alibaba in key investment areas like food-delivery service Ele.me, could fend off market-share gains by rivals like Tencent-backed Meituan-Dianping, as both have put off making a profit in order to win over consumers.
Analysts are also likely to ask management about the impact of the U.S.-China trade tensions. Alibaba’s share price has been highly correlated with the macro conditions in China, as it’s the most shorted stock and used as a proxy to bet for or against China’s economy. Alibaba Vice Chairman Joe Tsai has explained Alibaba could shield itself from a trade war by looking for products from countries outside the U.S. for Chinese consumers.
But if trade tensions escalate, it could hamper consumer confidence in China, just like last year, which would generate a more direct impact on its business empire from online shopping to video streaming to food delivery. In November, Alibaba noted slowing demand on big-ticket items like electronics and home appliances.
The options market is suggesting a larger-than-usual 5% one-day move for Alibaba stock Wednesday. Its share has recovered by 25.6% since the beginning of this year while the S&P 500 is up by 12%. Following President Donald Trump’s tweet on imposing additional tariffs on China, Alibaba stock dropped as much as 6%.