Alibaba Group Holding Ltd: Is Retail Strategy Outstripping Internal Expectations? Top Analyst Shares FQ3 Insights

Though shares are seeing some weakness today, Baird's Colin Sebastian spotlights "another strong quarter" for the Chinese e-commerce king.


Alibaba Group Holding Ltd (NYSE:BABA) shares are slipping roughly 4% in trading today- but why?

At first look, the Chinese e-commerce giant posted a robust fiscal third quarter print today, where earnings shot meaningfully ahead of the Street’s estimates. Revenue hit a mammoth 56% in year-over-year growth, marking a solid beat for the consumer player. Worthy of note, the fiscal third quarter usually benefits from soaring revenue on back of Singles’ Day, an anti-Valentine’s Day that offers singles e-commerce deals in China rather than dark chocolate. The largest sales event in the globe helped Alibaba’s core commerce business revenue climb 57.3%.

Not only did BABA trounce expectations, but it likewise is boosting is yearly guide following standout fiscal third quarter sales. So why the share pullback today?

Investors are getting skittish because on top of the strength of the print, Wall Street is paying notice to BABA’s second announcement: the company is purchasing roughly a third of its finance affiliate Ant Financial. This should pave the road for an initial public offering (IPO) of the Chinese payments company. The new shares are coming at a unique cost: specific intellectual property rights. To put it simply, no cash for this deal; just an equity stake. In return, Ant Financial is putting a close to royalty payments that swam beyond $300 million in fiscal 2017. Without the traditional cash deal, investors might find the acquisition more than a little odd.

Top analyst Colin Sebastian at Baird is weighing in for the bulls noting “no change” to his “positive thesis.” In reaction to the strength of the print, the analyst reiterates an Outperform rating on BABA stock with a $210 price target, which implies a close to 7% upside from current levels.

Sebastian attributes Alibaba’s stellar fiscal third quarter exhibit to a home run in core commerce, which saw a 57% year-over-year rise, surging new China consumer numbers, as well as sustained diversification between Cloud Computing and International Retail. To Sebastian, the fact that the BABA team hiked its fiscal 2018 revenue guide from 49% to 53% up to a range of 55% to 56% suggests that the company’s “omnichannel retail strategy is outpacing internal expectations, a key positive.”

“F3Q results driven by continued core commerce outperformance. Alibaba reported strong F3Q18 results, with strong revenue growth driven by core commerce (+57% Y/Y vs. +63% in F2Q18), healthy mobile engagement trends (Mobile MAUs of 580M, +17.6% Y/Y), and another acceleration in the expansion of Cloud services (+104% Y/Y, up from +99% in F2Q). Alibaba’s international business increased 93% Y/Y, driven by Lazada and AliExpress strength (the press release highlighted ‘very competitive’ SE Asian markets, with significant incremental investments expected to gain market share),” underscores the analyst.

Third fiscal quarter revenues of 83 billion yuan, which lands at around 12.7 billion U.S. dollars, mark a 56% year-over-year rise, far surpassing the Street’s forecast of 79.3 billion yuan. Digital Media and Entertainment is another segment that beat out expectations, experiencing a 33% year-over-year rise to 5.4 billion yuan compared to the Street’s 5 billion yuan. ¬†Adjusted EBITDA achieved 36.2 billion yuan, indicating a 44% margin that aligned with the Street’s call for a 43.8% margin. Sebastian explains, “investments in New Retail, globalization, digital media and logistics are a drag on core commerce margins.”

The company generated “solid” free cash flow, reaching 7.1 billion yuan, or 52% of revenues, with non-GAAP EPS of 10.61 yuan reaching past the Street’s estimate of 10.50 yuan. For context, BABA yielded $1.63 in U.S. dollars against the Street’s prediction of $1.61 in U.S. dollars.

“We note that Alibaba continues to ramp investments (including $15B USD R&D lab),” contends Sebastian, who concludes remaining encouraged by mobile trends and asserting: “Cloud computing momentum continues, growth accelerating as product offerings expand.”

Colin Sebastian has a very good TipRanks score with an 81% success rate and a high ranking of #9 out of 4,755 analysts. Sebastian realizes 28.2% in his annual returns. When recommending BABA, Sebastian earns 56.1% in average profits on the stock.

TipRanks underscores strong confidence on the Street circulating for Alibaba stock. Notably, all 17 analysts polled in the last 3 months are rating a Buy on the Chinese e-commerce king. With a return potential of nearly 14%, the stock’s consensus target price stands at $224.85.