Solid E-commerce Business Aids Alibaba (BABA), Risks Persist

On Dec 30, we issued an updated research report on Alibaba (NYSE:BABA) Group Holding Limited BABA.

The company’s dominance in the e-commerce market, persistent efforts to develop new products, international opportunities, and cloud and media initiatives will continue to spur growth.

Growth Drivers

Alibaba’s strong fundamentals are expected to continue driving momentum across operating fields.

The company’s e-commerce strength will remain one of the major growth drivers in the near term as well as long run. It has been making persistent efforts to add value to consumers and sellers through the consumer segment, product enrichment, as well as platform innovations.

In regard to this, Alibaba’s Tmall platform is well positioned to capture the rising demand for high-quality products and services. It accepts only verified stores and sells genuine products, helping build consumers’ trust and in turn increase conversion rates.

Cloud computing has been emerging as a key technology to fight the battle against the coronavirus pandemic. This technology has been witnessing higher usage globally as it allows data interoperability in a scalable, cost-efficient way by data collection, processing, analyzing and sharing across platforms.

The company’s cloud business has fast emerged as a major contributor to top-line growth. Its cloud revenues are expected to further increase in the near term, owing to an increase in spending from enterprise customers. The company has been continually adding new features to cloud offerings for driving customer spending.

In addition, Alibaba rolled out a number of products based on emerging technologies of Artificial Intelligence, Machine Learning and Internet of Things to cater to the rising demand for cloud architecture, along with data analytics and security in the retail industry.
These products, which are expected to develop a collaborative management platform across various businesses, remain growth catalyst.

The company’s Mobile Monthly Active Users has been improving over the last few quarters. This is because of increased adoption of mobile devices by consumers as the primary method of accessing Alibaba’s platforms.

It has been building the online marketing inventory on both mobile and PC, as well as recording higher monetization rates. These factors are likely to further drive Alibaba’s profits.

Earnings Surprise History: Alibaba has a strong earnings surprise history. The company outpaced the Zacks Consensus Estimate in all the trailing four quarters, delivering an average earnings surprise of 25.1%.

Headwinds

Alibaba has been recently grappling with antitrust hassles. Precisely, a probe has been announced by China’s State Administration for Market Regulation to look into its unhealthy business practices.

These allegations do not bode well for Alibaba as these scams might hurt shareholders’ sentiments.

Also, higher costs associated with new initiatives remain a major concern. It has been spending heavily in new areas of core online retail business, including supermarkets, stores, new artificial intelligence, digital entertainment and cloud computing businesses.

Also, the company has completed a number of acquisitions over the past year. While these acquisitions are augmenting key capabilities and enabling it to expand both in China and internationally, integration risks remain. Moreover, the acquired businesses bring additional costs that are likely to add to its costs in the near term.

In addition, increasing competition from companies like Amazon.com Inc (NASDAQ:AMZN). and JD (NASDAQ:JD).com, among others, as well as deceleration of growth in the e-commerce market — both domestically and internationally — remain concerns.

Zacks Rank & Stocks to Consider

Alibaba carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector include Stamps (NASDAQ:STMP).com Inc. STMP, PetMed Express PETS and ASOS (LON:ASOS) Plc ASOMY. While Stamps.com sports a Zacks Rank #1 (Strong Buy), PetMed and ASOS Plc carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings per share growth rate for Stamps.com, PetMed and ASOS is projected to be 15%, 10% and 27%, respectively.

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