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Alibaba (BABA - Free Report) reported strong first quarter 2017 results wherein it broke out core commerce, media, cloud and other growth initiatives for the first time. So the strong revenue growth in the non-commerce areas is no more a matter of conjecture, but information published by the company.
Alibaba has often been referred to as the Amazon (AMZN - Free Report) of China and it certainly appears to be following in the footsteps of its American peer. Despite being the leading ecommerce player in the country, it has been out to other areas, particularly cloud and media. While these efforts may be humble numbers compared to what Amazon does but Alibaba has some unique advantages that should enable it to grow at sustainably stronger rates.
Alibaba’s Unique Advantages
The most significant of these advantages is of course the fact that it is a Chinese company operating in China, the kind of place in fact that the government does everything possible to support. Alibaba may have IPO-ed in the U.S. but the company’s operations, methods and employees are all primarily Chinese. Not just that: founder Jack Ma has said that it accounts for around 80% of the Chinese retail ecommerce market, which is huge because according to him, urban China does most of its sales online.
Alibaba can also bank on favorable demographics (growing middle class) and this group’s seemingly insatiable demand for goods manufactured internationally. China’s population is attractive for multi-national companies looking for growth, so it creates a win-win situation (if you can ignore the counterfeiting problems for a moment).
So what all this means is that this is one company that has a significant impact on the economy and therefore some leverage in its dealings with the government. The flip side to that is that when the Chinese economy doesn’t do so well, the company is likely to feel the pinch.
Recent China Data
So for instance, when fresh data coming out of China tells us that the economy continues to slow down, there is always the fear that its growth will be affected. China’s National Bureau of Statistics (NBS) says that that there is continued deceleration in industrial output (which grew 6.0% from July 2015), retail sales (which grew 10.2% from July 2015) and fixed asset investment (which grew 8.1% from January to July this year). The last of these is probably most concerning because lower investment seems to indicate that the trend will continue.
To make matters worse, James Daniel, IMF Mission Chief for China has said that China's corporate debt is still manageable, but at approximately 145% of GDP, it is high by any measure. The reason is unsustainably high growth targets coupled with very little control on local governments and state-owned enterprises (SOEs). These SOEs account for half the credit and only a fifth of the industrial output. putting undue pressure on the credit situation.
Beating Chinese Growth Concerns
Alibaba has been focused on developing rural business, international expansion, logistics synergies and branching into high-growth areas like cloud computing.
In the last quarter, the company’s cloud revenues grew 156% year over year to 1.2 billion RMB with paying customers growing 119% to 577K. Moreover, losses narrowed significantly, so the business is likely to turn profitable soon.
The company is now tying up with international players like SAP to get them to use its cloud to reach Chinese customers. Since the Chinese market is largely untapped while developed markets are relatively mature, Ma has already started playing up Alibaba’s position as a platform for these firms to reach customers in China.
It also recently entered into a first-of-its-kind deal with HTC, according to which they will build necessary data center infrastructure to deliver virtual reality content to HTC’s VR customers. The goal is to speed up VR content creation in the country so the struggling phone maker can diversify into other things. It already sells the Vive VR headset and just like Facebook it figures that increased VR content will definitely help sales.
Summing Up
Alibaba reported strong results this quarter and the numbers may be expected to look up further before long. The cloud computing segment in China is nascent, fast-growing and protected from competitors by the Chinese government. So what could be a better way to growth? To top that off, the company has a growing media business, one that it has supplemented with a number of acquisitions. It also has a finger in many other pies through its “other” segment.
The shares have a Zacks Rank #3 (Hold) but the rank could move up given the many growth levers that are gradually coming to light.
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Alibaba's Cloud Can Help Defy Economic Slowdown
Alibaba (BABA - Free Report) reported strong first quarter 2017 results wherein it broke out core commerce, media, cloud and other growth initiatives for the first time. So the strong revenue growth in the non-commerce areas is no more a matter of conjecture, but information published by the company.
Alibaba has often been referred to as the Amazon (AMZN - Free Report) of China and it certainly appears to be following in the footsteps of its American peer. Despite being the leading ecommerce player in the country, it has been out to other areas, particularly cloud and media. While these efforts may be humble numbers compared to what Amazon does but Alibaba has some unique advantages that should enable it to grow at sustainably stronger rates.
Alibaba’s Unique Advantages
The most significant of these advantages is of course the fact that it is a Chinese company operating in China, the kind of place in fact that the government does everything possible to support. Alibaba may have IPO-ed in the U.S. but the company’s operations, methods and employees are all primarily Chinese. Not just that: founder Jack Ma has said that it accounts for around 80% of the Chinese retail ecommerce market, which is huge because according to him, urban China does most of its sales online.
Alibaba can also bank on favorable demographics (growing middle class) and this group’s seemingly insatiable demand for goods manufactured internationally. China’s population is attractive for multi-national companies looking for growth, so it creates a win-win situation (if you can ignore the counterfeiting problems for a moment).
So what all this means is that this is one company that has a significant impact on the economy and therefore some leverage in its dealings with the government. The flip side to that is that when the Chinese economy doesn’t do so well, the company is likely to feel the pinch.
Recent China Data
So for instance, when fresh data coming out of China tells us that the economy continues to slow down, there is always the fear that its growth will be affected. China’s National Bureau of Statistics (NBS) says that that there is continued deceleration in industrial output (which grew 6.0% from July 2015), retail sales (which grew 10.2% from July 2015) and fixed asset investment (which grew 8.1% from January to July this year). The last of these is probably most concerning because lower investment seems to indicate that the trend will continue.
To make matters worse, James Daniel, IMF Mission Chief for China has said that China's corporate debt is still manageable, but at approximately 145% of GDP, it is high by any measure. The reason is unsustainably high growth targets coupled with very little control on local governments and state-owned enterprises (SOEs). These SOEs account for half the credit and only a fifth of the industrial output. putting undue pressure on the credit situation.
Beating Chinese Growth Concerns
Alibaba has been focused on developing rural business, international expansion, logistics synergies and branching into high-growth areas like cloud computing.
In the last quarter, the company’s cloud revenues grew 156% year over year to 1.2 billion RMB with paying customers growing 119% to 577K. Moreover, losses narrowed significantly, so the business is likely to turn profitable soon.
The company is now tying up with international players like SAP to get them to use its cloud to reach Chinese customers. Since the Chinese market is largely untapped while developed markets are relatively mature, Ma has already started playing up Alibaba’s position as a platform for these firms to reach customers in China.
It also recently entered into a first-of-its-kind deal with HTC, according to which they will build necessary data center infrastructure to deliver virtual reality content to HTC’s VR customers. The goal is to speed up VR content creation in the country so the struggling phone maker can diversify into other things. It already sells the Vive VR headset and just like Facebook it figures that increased VR content will definitely help sales.
Summing Up
Alibaba reported strong results this quarter and the numbers may be expected to look up further before long. The cloud computing segment in China is nascent, fast-growing and protected from competitors by the Chinese government. So what could be a better way to growth? To top that off, the company has a growing media business, one that it has supplemented with a number of acquisitions. It also has a finger in many other pies through its “other” segment.
The shares have a Zacks Rank #3 (Hold) but the rank could move up given the many growth levers that are gradually coming to light.
ALIBABA GROUP Price and EPS Surprise
ALIBABA GROUP Price and EPS Surprise | ALIBABA GROUP Quote
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