Philadelphia, Pennsylvania – (StockNewsDesk) – 11/04/2014 — Alibaba shares were flat in the premarket after the company reported better than expected revenue. The Chinese e-commerce giant reported earnings per share of 0.45 and revenue of $2.74 billion in its latest quarter. The earning’s picture was mixed as Alibaba’s earnings were less impressive when accounting for share-based compensation, with this taken into account EPS is at 0.22. However, investors are more focused on revenue now.
Investors’ Optimism Rewarded
These numbers were well above Wall Street consensus, which was expecting revenue of $2.61 billion, but fairly in line with investors’ expectations based on Estimize data. Estimize crowd sources earnings expectations with a large sample size of investors and analysts, providing a more accurate picture of investors’ expectation rather than pure sell side estimates.
Another perspective confirming this view is the impressive rally in Alibaba shares in the days and weeks leading up to the earnings report. This unusual price action typically correlates with traders being confident that the stock will report a positive surprise in earnings. In the two weeks prior to this release, Alibaba’s shares climbed nearly 25%.
The primary attraction of Alibaba’s shares is to bet on its growth. In this respect, the company delivered, largely fueled by a greater number of buyers flocking to Alibaba’s platform and continued growth in China’s e-commerce market. Merchandise volume grew 49% on a year over year basis, with strong growth in the number of transactions per buyer, as well as the average value of each transaction.
This type of growth across all metrics is what gives Alibaba its high valuation. In fact, these types of growth rates are unprecedented for a company of Alibaba’s size. The biggest number that investors were watching in its latest earnings report was revenue growth, which came in above expectations at 54% on a year over year basis. This is the type of revenue growth that can give Alibaba a price to sales ratio of over 10. Out of the major Internet companies based in the US, only Facebook has a double-digit price to sales ratio, but it also has profit margins in the high double digits.
Some Warning Signs
Given Alibaba’s generous valuation, any slight hiccup can lead to selling. There are certainly some issues that bears could seize on to justify some profit taking in Alibaba, with the most pertinent being Alibaba’s declining profit margin, which slipped to 18%. This slip is primarily due to Alibaba spending more to invest in operations as well as more aggressive marketing to fend off competitors in domestic markets and new markets.
Another issue reflected in the company’s diluted earnings is the lack of a lock-up period, which is typical for most IPOs. Most IPOs have a six-month lock-up period during which insiders cannot sell. Alibaba has no such period, indicating higher levels of supply. Additionally, Alibaba is using its shares as a currency to reward its management team. These factors could exacerbate any weakness in the stock.