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Alibaba Fails to Deliver – Yet Again

Posted on Monday, Aug 17th 2015

Last week, Chinese e-commerce giant Alibaba (NYSE: BABA) announced rather disappointing second quarter results. Growth has slowed down significantly and the stock has already fallen more than 35% since its post IPO peak. Alibaba is investing into several growth strategies, hoping one of them will pay off.

Alibaba’s Financials

Alibaba’s revenues grew 28% over the year to $3.27 billion, falling short of the Street’s forecast of $3.39 billion. This was their slowest growth recorded in the last three years. Alibaba attributed part of the decline in revenues to the shuttering of their online lottery business and the SME loan business which was transferred to Ant Financial. Excluding the impact of these businesses, revenues would have grown 36% over the year. EPS for the quarter of $0.59 was ahead of the Street’s target of $0.58.

Gross merchandise volumes (GMV) on China retail marketplaces grew 34% over the year to $109 billion. By segment, total China commerce sales grew 25% to $2.7 billion. International commerce sales accounted for $282 million in revenues and grew 19% over the year. Cloud computing and Internet infrastructure revenues grew 106% to $78 million and other revenues increased 82% to $210 million.

Alibaba’s Growth Plan

Alibaba is focused on four key areas to drive growth – globalization, mobile, expanding into rural China, and investing in cloud computing. As part of their globalization efforts, Alibaba has been bringing international brands into China. They recently tied up with Macy’s to bring their goods to China. Through the agreement, Macy’s will launch an exclusive store on Alibaba’s Tmall platform later this year.

Their investments in mobile are already paying off. This was the first quarter when mobile revenue for the retail segment accounted for more than half of total retail revenues. Mobile GMV grew 125% over the year to $60 billion and accounted for $1.288 billion in revenues.

Alibaba recently invested $4.6 billion to acquire a 20% stake in Suning, China’s largest home appliance retailers. Suning has over 1,600 locations throughout China and has access to 4.52 million square meters of warehouse space throughout China along with 49 logistics centers. Through the partnership, Alibaba will be able to leverage Suning’s extensive reach within China to improve their current logistics issues in sending goods to customers. Additionally, Alibaba will also be able to tap into the emerging online-to-offline marketspace where customers can search the goods they want to purchase on an online device and make the purchase through an offline channel.

According to Bain & Co. report, cloud spending in China is projected to grow from $1.5 billion in 2013 to $20 billion by 2020. Alibaba is investing heavily in improving their cloud computing efforts. They announced plans to invest $1 billion in their cloud computing arm Aliyun to better compete with Amazon Web Services. Part of the investment will be used to expand their data centers within Middle East, Japan, and Europe and open their first data center in the Silicon Valley in the US. Aliyun is already a market leader in China, but it will take a big effort for them to reach that stature in the US.

The market was not pleased with their recent quarter performance and hit a 52-week low of $73.38 last week. Their stock is trading at $74.76 with a market capitalization of $185.18 billion. It touched a 52-week high of $120.00 in November last year.

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