Why Alibaba Earnings Seem Weak

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Alibaba Group Holding Ltd. (NYSE: BABA) reported fourth-quarter and fiscal-year 2017 results before markets opened Thursday. The China-based Internet giant reported quarterly adjusted diluted earnings per American depositary share (ADS) of $0.63 on revenues of $5.61 billion. The fourth-quarter consensus estimates had called for earnings of $0.65 per ADS on revenues of $5.23 billion. One ADS is equal to one ordinary share, and the exchange rate used is based on 6.8832 yuan per dollar.

For the full year, Alibaba reported earnings per ADS of $3.41 and $22.99 billion in revenues. In the prior year, the company reported earnings of $2.43 per ADS and revenues of $14.68 billion. Analysts were looking for earnings of $3.44 per ADS and revenues of $22.65 billion.

The number of annual active buyers on Alibaba’s retail marketplaces totaled 454 million at the end of the fourth quarter, up by 11 million (2.5%) sequentially. Monthly mobile active users rose from 493 million at the end of December to 507 million (up 2.8%) at the end of March. The company’s core commerce revenues rose by 47% year over year, the cloud-computing segment revenues rose by 103%, digital media and entertainment segment revenues rose 234%, and other revenues rose 88%.

Operating income rose 86% year over year to $1.39 billion in the quarter. Excluding the impact of share-based compensation, the cost of revenue rose to 64% of revenue in the quarter from 39% in the year-ago quarter. Alibaba attributed the increase to an increase in content acquisition costs of Youku Tudou, costs of inventory of Lazada and logistics costs paid to Cainiao Network relating to fulfillment services provided to Tmall Supermarket.

Alibaba cost of revenues either has to slow down or investors have to take a longer view. Earnings will have trouble meeting forecasts as long as the company’s cost keep rising.

The company’s chief financial officer, Maggie Wu, said:

We reported another excellent quarter, with revenue growth accelerating to 60%, the highest growth rate we’ve achieved since our IPO. We also reported very strong fiscal year revenue growth of 56% with annual non-GAAP free cash flow of approximately US$10 billion. Our robust results demonstrate the strength of our core businesses, as well as the positive momentum of our emerging businesses, including cloud computing, where we continue to see strong growth and market leadership.

Alibaba did not provide a forecast in its press release. Analysts expect earnings per ADS of $0.87 on revenues of $6.32 billion in the company’s first fiscal quarter of 2018. For the full fiscal year ending in March, consensus estimates call for earnings of $4.26 per ADS on $30.02 billion in revenues.

Alibaba traded down around 0.2% in Tuesday’s premarket session, at $120.30 in a 52-week range of $73.30 to $124.34. The consensus 12-month price target was $131.38 per ADS before this morning’s announcement. The high price target estimate is $180.17.