Tech

Alibaba shares pop after earnings beat thanks to e-commerce, cloud as analysts see a big rally ahead

Key Points
  • Alibaba reported results for the June quarter that beat on both revenue and earnings.
  • The company's core commerce and cloud computing businesses boosted results.
  • Analysts are broadly positive on Alibaba's stock with many expecting a rally over the next 12 months.
A monitor displays Alibaba Group signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Jan. 7, 2019.
Michael Nagle | Bloomberg | Getty Images

Alibaba shares rallied in premarket after the company posted better-than-expected revenue and earnings for its June quarter, though sales growth slowed.

Here's what the Alibaba's reported:

  • Revenue of 114.92 billion ($16.74 billion), according to the exchange rate in the earnings release. That was an increase of 42% year-over-year and better than the 111.73 billion yuan expected, according to Refinitiv data. That was slower than the more than 61% year-on-year revenue growth seen in the same period last year however.
  • Non-GAAP diluted earnings per share (EPS) of 12.55 yuan versus 10.25 yuan expected, according to Refinitiv estimates.

Shares were up over 3% in pre-market trade.

The growth was driven by the company's core commerce business, which includes its Tmall and Taobao shopping platforms, as well as its booming cloud division.

Core commerce, which accounts for the majority of revenue, rose 44% year-on-year in the June quarter. This was helped not only by Tmall, but also by its food delivery business Ele.me, which saw 137% revenue growth year-on-year.

Annual active consumers on Alibaba's China retail marketplaces reached 674 million, an increase of 20 million from the 12-month period ended March 31, 2019. The company said that over 70% of those new consumers were from less-developed cities, highlighting its push into lower tier Chinese cities.

The earnings report was closely watched by Wall Street given the ongoing U.S.-China trade war.

"China e-commerce players have come under major pressure in light of worries around growth in the region and macro slowness. We believe ... the bark is worse than bite at this point although this remains a major ('prove me') quarter for BABA," Daniel Ives, managing director of equity research at Wedbush Securities, told CNBC ahead of the report.

"Geopolitical uncertainties have placed additional pressure on global growth ... this is both a challenge and opportunity for the Chinese economy ... consumption and the service sector will become the new engine for … growth," Daniel Zhang, CEO of Alibaba said on the earnings call, adding that the company is "well-positioned" to take advantage of this trend.

Cloud

One of the most promising areas of Alibaba's business, according to analysts, is cloud computing. Cloud computing revenue grew 66% year-over-year to 7.79 billion yuan.

"Cloud remains the key asset we believe the Street is focused on. Given the penetration of cloud in China, BABA has a major green field opportunity over the coming years on this front,"

Alibaba is the largest cloud computing player in China by market share but is facing increasing competition from large rivals like Tencent.

IPO delayed?

Alibaba's shares are up nearly 20% this year, but Wall Street thinks they can go higher over the next year. The average price target on the stock is $218.09, according to Reuters data. That implies a 34.5% upside from Wednesday's close.

The Chinese e-commerce giant is also reportedly looking to hold an initial public offering in Hong Kong, which could raise as much as $20 billion. On Thursday, however, the New York Post reported that Alibaba was weighing whether to delay the listing, which was scheduled for September, amid the anti-China protests in Hong Kong. Alibaba declined to comment when contacted by CNBC about the matter.

Despite some of the near-term headwinds, such as the trade war, Alibaba's various investments should set it up for growth over the next few years, according to Thomas Chong, equity analyst at Jefferies.

"Alibaba has multiple growth drivers in the years ahead, in our view, with the core marketplace a strong cash cow enjoying secular momentum amid China's ongoing consumption upgrade, thanks to solid execution and technological ability to digitalize the retail sector, thereby enhancing efficiency," Chong wrote in a recent note.

"Its highly synergistic ecosystem enables it to ramp up easily in lower tier cities and local services. It has clear market leadership in cloud computing, which is the backbone of digitalization across different industries."

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