Alibaba: Strong revenue growth but margins under pressure

On Thursday, 23 August, Alibaba reported a 1Q19 revenue jump of 61% YoY (its strongest ever) to CNY80.92bn ($12.23bn) from CNY50.18bn in 1Q18 and above the Thomson Reuters consensus forecast of CNY80.75bn. However, net income of CNY8.69bn ($1.27bn) was a 40.8% YoY drop from the CNY14.68bn reported in 1Q18, while EPS came in at CNY3.30 vs CNY2.79 expected. We note that net income was negatively impacted by an CNY11.5bn hit due to an increase in the valuation of Ant Financial, causing shares given to Alibaba employees to be more expensive. Excluding that one-time impact, net income attributable to shareholders and diluted EPS would have jumped by 35% YoY and 33% YoY, respectively. The company warned that investments in its delivery business would keep pressuring profits.

In terms of the revenue breakdown by business segment, Core Commerce, which includes its online shopping sites Tmall and Taobao and is the firm’s biggest business by far accounting for c. 86% of sales, posted revenue of CNY69.19bn ($10.46bn; +61% YoY); Cloud Computing, CNY4.7bn ($710mn; +93% YoY); Digital Media and Entertainment, CNY5.98bn ($903mn; +46% YoY) and Innovation Initiatives and Others, CNY1.06bn ($160mn; +64% YoY).

Annual active consumers on the business’ China retail marketplaces reached 576mn – an increase of 24mn from FY18. Mobile monthly active users (MAUs) on Alibaba’s China retail marketplaces reached 634mn in June 2018, an increase of 17mn over March 2018’s number.

The Group’s operating margin dipped to 10% in the quarter vs 15% in 4Q17 and 35% in 1Q17. The margin is expected to continue facing pressure due to the rapid investments Alibaba is making in new areas. Alibaba said the margin dip was due to “share-based compensation expenses related to Ant Financial … “.

The company also announced in the results presentation that two of its majority-owned local delivery services, and Koubei, would be merged into a new entity that would also receive a new $3bn investment from both Alibaba and Softbank

Despite reporting impressive numbers in many business areas, Alibaba’s share price traded lower after earnings were announced in what seems to be a reaction to the mixed headline numbers. The share price is however up 3.5% since Thursday and YTD the share has gained 3.3%.



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