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Relax, Alibaba Group Holding Ltd (BABA) Stock Is Fine

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Even in a market that has been exceedingly generous with large-cap tech stocks, Alibaba Group Holding Ltd (NYSE: BABA ) stock has impressed so far in 2017.

Source: Photo by via Alibaba

Heading into the Alibaba earnings report on Thursday morning, BABA stock had gained 37% so far in 2017, ahead of the 26% increase in Amazon.com, Inc. (NASDAQ: AMZN ) stock and the 31% rise at Apple Inc. (NASDAQ: AAPL ). It's been a nice run for Alibaba stock, which actually hasn't been a star performer.

BABA stock did touch an all-time high on Tuesday, but was only pennies above levels first reached in November 2014. Clearly, sentiment has improved, and strong earnings from Chinese peers JD.Com Inc.(ADR) (NASDAQ: JD ) and Weibo Corp (ADR) (NASDAQ: WB ) seemed to augur a strong Alibaba earnings report.

And that's exactly what Alibaba delivered this morning . Yet, BABA stock has declined modestly by 2% as of this writing.

Investors possibly were expecting more from the quarter. But that seems a bit greedy. Expectations aside, Alibaba earnings for the fourth quarter look like more than enough to suggest upside in BABA stock.

The Alibaba Earnings 'Miss' Was Anything But

Relative to the headline numbers, Alibaba earnings were mixed. For Q4, total revenue grew 60% year-over-year to $5.6 billion. The revenue growth figure beat Street estimates by some nine points. Earnings per share, however, were 2 cents short of analyst consensus, even while increasing 45% to 63 cents.

It appears, however, that the "miss" on EPS occurred due to higher-than-expected taxes and a doubling of a loss from equity investees. Alibaba earnings were hit by a higher effective tax rate: 23% on a non-GAAP basis, against 14% the year before. Adjusted Ebitda of RMB 16.6 billion actually was a full RMB 1 billion ahead of expectations on that front.

The apparently higher-than-expected tax rate was one of the few disappointments in the Alibaba earnings report; 60% growth off a $3.5 billion base is a feat that only a handful of companies have ever been capable of achieving.

That caps off a year in which sales increased 56% - or about $8.2 billion, a truly phenomenal achievement.

Behind the Headlines

The details of the Alibaba earnings report seem to support the bull case for BABA stock as well. Cloud computing revenue once again doubled, rising 103% year-over-year. That business - quickly becoming a significant competitor to Amazon Web Services - is a huge part of the long-term bull case for Alibaba stock.

Paying customers grew 14% Q/Q, with Alibaba adding over 100,000 new customers in just three months. AWS has been a huge part of the 300%-plus run in AMZN stock over the past few years, and Alibaba's cloud division has the potential to be equally important - particularly if it continues to grow at 100%-plus.

In the core commerce business, revenue increased 45% YOY. GMV (gross merchandise value) rose 22%. Online shopping website Taobao cleared the half-billion mark in monthly active users - another incredible feat from Alibaba. Digital Media and Entertainment sales growth was actually the strongest of any group, rising 271%.

Much of that came from last year's acquisition of Youku Toudu - to be lapped after this quarter - but commentary continues to suggest that Alibaba is happy with its purchase.

Ebitda margins did compress ~500 basis points year over year, but that was attributed to the additions of Youku Tudou and Southeast Asia-focused Lazada. Those businesses aren't as profitable as the rest of Alibaba - at least not yet. Given Alibaba's overall margins, however, that may soon change.

BABA Stock Is a Buy

All told, Alibaba earnings for Q4 were more than enough to support the bull case for BABA stock. As impressive as Q4 and FY17 results were, it's not as if BABA stock is all that expensive.

The stock trades at about 33 times trailing earnings plus cash, and closer to 27 times earnings on a free cash flow basis. With FY 2018 likely to be another growth year, those multiples assume either a steep change in the Chinese economy or a stumble by Alibaba itself.

There's no evidence on either at the moment - and certainly no evidence of weakness in Alibaba earnings. Expectations were high ahead of Q4, but Alibaba, at worst, met those expectations. That sets the stage for more upside in BABA stock - even if it takes a nervous market a few sessions, or a few weeks, to get there.

As of this writing, Vince Martin has no positions in any securities mentioned.

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The post Relax, Alibaba Group Holding Ltd (BABA) Stock Is Fine appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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