Alibaba Group Holding Ltd - ADR

-1.08 (-0.48%)
4:15:23 PM EDT: $225.30 -0.04 (-0.02%)
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What Alibaba Does Better Than EVERY Technology Company

Alibaba Group Holding Limited (BABA)
86.545 -0.085 (-0.10%)
Sector: Information Technology
Published by Capital Market Laboratories on 2015-06-15

What does the rating mean?
3-Month Stock Move: +5.6%
6-Month Stock Move: -17.7%

30-day Option Implied Volatility: 23.8%
Implied Stock Range: ($81.80, $91.20)
What does "implied stock" mean?

Written by Ophir Gottlieb, 6-15-2015

Alibaba is quite different from its most commonly named competitors ( Inc. and, Inc). While most on-line retailers house their own inventory, for the most part BABA doesn't do that at all. Instead it acts as a platform for other retailers to reach BABA's immense customer base. In the charts below, I will show you somethings you likely have never seen before and are absolutely breathtaking.

As a business model, this has proven to lead to absolutely enormous earnings margins (stunning chart below). While BABA has ~1/10th the revenue of AMZN, it generates more than ~10x the earnings. BABA's largest obstacle is sales growth outside of China.

BABA just recently announced that will be launching a sort of Netflix / HBO competitive product inside China. Expansion into China with a wider array of products may make a much more bullish and compelling argument than a huge spend to make a business model outside of China. Don't get me wrong, BABA does not have to be isolated to China, but the fact that management has not lost focus on where it actually makes money is quite promising for the firm.

Now, the "platform" based model that differentiates BABA does make it susceptible to gamesmanship and counterfeits from participating retailers, and while there have been cries of foul surrounding some of BABA's participant retailers, those have been, to this point, mostly headline grabbing but not really material to BABA's business. Business Insider has written that the firm is trying to lessen the counterfeit goods trade by creating home-grown brands, which has been received by some with great enthusiasm but critics call it misguided and off the central focus, which they claim should be to actively scrub its online marketplaces of widespread listings of fakes.

Here are the earnings estimates for next quarter for BABA.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-12 $0.43 $3,393.9 M $3,384.0 M $2,810.7 M Provided by ZACKS

These are the core fundamentals that are driving BABA's star rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 12,292 8,446

Operating Margin (QTR) 1.175 1.83 2.05 FALLING

Net Income (TTM US$ Millions) 3,913 3,750 RISING

Levered Free Cash Flow (TTM US$ Millions) 6,533

Research and Development (US$ Millions) 491 193 137 RISING

Research and Development Expense/Revenue 0.175 0.100 0.098 RISING

Stock Returns and Chart

BABA is up +5.6% over the last three months and down -17.7% over the last six months.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 12,2928,446

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters, which is essentially all of BABA's existence as a public company.

Note that BABA is growing revenue by 45.54% year-over-year. Again, the question is about growth from here forward. Some will have to come from outside of China, but it appears the firm still has room to grow inside China with new offerings.

What do all these numbers mean?
BABA's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

Click Here to Interact With This Chart

Revenue (TTM US$ Millions) Peer Chart

Let's look at Revenue (TTM) for BABA versus its peers (AMZN, JD) in the chart below. Note how little BABA's revenue is to AMZN based on its "platform" based business model. Then wait until the next two charts.

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While revneue is dominated by AMZN, check out these two images. The first is BABA's net income vs AMZN and JD on the y-axis, with revenue (ttm) on the x-axis.

Click Here to Interact With This Image

This is an insane image. BABA earnings tower above JD and AMZN while the other two firms have 2x-10x the revenue. This is the clearest image and demonstration of the different business models.

The next chart plots all of mega cap technology equal spaced on the x-axis (rank) and the net income margin % on the y-axis.

Click Here to Interact With This Image

BABA not only dominates the on-line retail space with respect to earnings margins, but it actually dominates all of technology. Now there's a fact (and chart) we rarely see.

Net Income (TTM US$ Millions) 3,9133,750RISING

Net Income (after tax profit) over the trailing twelve months (TTM) for BABA is in fact rising but if we back away from a four-quarter comparison, we can actually see falling earnings. For the most recent trailing-twelve-months (TTM) the company reported net income of $3,913 (million). That's an increase in the most recent year from $3,750 (million) or a 4.35% change but is down from the peak three quarters ago of over $5 billion.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).

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Levered Free Cash Flow (TTM US$ Millions) 6,533

Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For BABA the current value reported by the company is over $6.5 billion. The limited data gives us less information than for most companies to really understand the trends in the fundamentals, but whatever the case, the firm is generating HUGE cash flow.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.

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BABA has the largest net income margin % of all of large cap technology, not to speak of its dominance in the retail space. The question has always been (and will always be until it's answered) about growth outside of China. It's an interesting practice, but if you are not reading this from China, have you ever even visited the website, let alone considered purchasing from it? Leave a comment below, I'd love to see the responses. BABA's management knows the tough road to grow outside of home base, and I think there's a compelling thesis building around the firm's continued revenue growth within china with new offerings.

If BABA does grow outside of the US, keep in mind those earnings margins. A little bit of revenue makes "a lot a bit" of earnings.