Alibaba (BABA) Q2 Earnings Beat Estimates, Revenues Lag

Alibaba Group Holding Limited (NYSE:BABA) reported second-quarter fiscal 2020 earnings of $1.83 per share, surpassing the Zacks Consensus Estimate of $1.55. Also, the bottom line increased 36% year over year.

It reported revenues of RMB119.02 billion (US$16.65 billion), up 40% from the prior-year quarter. The year-over-year revenue increase was driven by strength in the company’s China commerce retail business and strong growth of Alibaba Cloud.

However, revenues missed the Zacks Consensus Estimate of US$16.72 billion.

Revenues by Segments

Alibaba has four reportable segments — Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives. The details of these segments are discussed below.

Core Commerce: This segment comprises marketplaces operating in retail and wholesale commerce in China, and international commerce. The segment’s revenues in the quarter totaled RMB101.2 billion (US$14.2 billion), reflecting an increase of 40% on a year-over-year basis.

China commerce retail business (64% of total revenues) — The business vertical’s revenues in the quarter were RMB75.79 billion (US$10.6 billion), reflecting an increase of 40% year over year. The increase was driven by contributions from direct sale businesses, including Tmall Supermarket and Freshippo, as well as consolidation of Kaola starting in September 2019. Also, combined customer management and commission revenues attributed to strong growth in the quarter.

China commerce wholesale business (3% of total revenues) — This business generated revenues of RMB3.3 billion (US$459 million), reflecting a 31% increase from the year-ago quarter. The increase was due to a rise in average revenues from paying members on 1688.com, strength in domestic wholesale marketplace and growth in revenues from Lingshoutong.

International commerce retail business (5% of total revenues) — Revenues in the quarter were RMB6 billion (US$840 million), increasing 35% year over year. The increase was driven by revenue growth from AliExpress and Lazada.

International commerce wholesale business (2% of total revenues) — This business generated revenues of RMB2.4 billion (US$341 million), increasing 20% from the prior-year quarter. The growth was due to an increase in the number of paying members on alibaba.com platform.

Cainiao logistics services (4% of total revenues) — This business generated revenues of RMB4.76 billion (US$666 million). The segment represents revenues from domestic and cross-border fulfilment services provided by Cainiao Network, after elimination of inter-company transactions.

Consumer services (6% of total revenues) — This business generated revenues of RMB6.8 billion (US$956 million), increasing 36% year over year.

Others business (1% of total revenues) — The business generated revenues of RMB2.1 billion (US$296 million), reflecting a 90% year-over-year increase.

Cloud Computing: This segment comprises Alibaba Cloud that offers a complete suite of cloud services. Revenues in the quarter were RMB9.3 billion (US$1.3 billion), up 64% from the year-ago quarter, driven by an increase in average spending per customer.

Digital Media and Entertainment: The segment operates businesses through media properties that include UCWeb, Youku Tudou, OTT TV service, Alibaba Music and Alibaba Sports. Revenues from the segment were RMB7.3 billion (US$1.02 billion), reflecting an increase of 23% on a year-over-year basis. The segment’s top-line growth was driven by consolidation of Alibaba Pictures.

Innovation Initiatives and Others: This segment includes businesses such as the YunOS operating system, AutoNavi, DingTalk enterprise messaging and others. Revenues in the quarter were RMB1.21 billion (US$169 million), up 14% year over year, driven by an increase in revenues from Amap.

Alibaba Group Holding Limited Price, Consensus and EPS Surprise

Key Metrics

Mobile Monthly Active Users (MAUs) — Mobile MAUs were 785 million, improving 17.9% from the prior-year quarter and 3.9% sequentially. This improvement was caused by an increase in the adoption of mobile devices by consumers as the primary method of accessing Alibaba’s platforms.

Annual Active Buyers — China retail marketplaces had 693 million annual active buyers, reflecting 15.3% year-over-year growth and 2.8% sequential improvement.

Operating Results

Alibaba’s operating expenses (product development + sales and marketing + general and administrative) of RMB29.5 billion increased 32.7% from a year ago.

Operating margin was 17%, up 100 basis points year over year.

Adjusted EBITDA also increased 39% year over year to RMB37.1 billion (US$5.19 billion).

Balance Sheet

Alibaba exited the fiscal second quarter with cash and cash equivalents, as well as short-term investments of approximately RMB235.3 billion (US$32.9 billion) compared with RMB212.2 billion (US$30.9 billion) in first-quarter fiscal 2020.

Cash Flow/Share Repurchase

Net cash flow from operations was RMB47.33 billion (US$6.6 billion) and free cash flow was RMB30.49 billion (US$4.3 billion) in the fiscal second quarter.

Zacks Rank and Stocks to Consider

Currently, Alibaba has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector include Itron, Inc. (NASDAQ:ITRI) , Stamps.com Inc. (NASDAQ:STMP) and Carvana Co. (NYSE:CVNA) . While Itron and Stamps.com sport a Zacks Rank #1 (Strong Buy), Carvana carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Itron, Stamps.com and Carvana is currently projected at 25%, 15% and 9%, respectively.

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