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A Close Look at Alibaba's Quarter

Alibaba (NYSE: BABA) shares have been pounded in recent months on fears of tighter regulations from the Chinese government, following a $2.8 billion antitrust fine against the company in April.

Alibaba stock also sold off following its recent earnings report as the company missed expectations on the top line. Can this struggling tech stock bounce back? In this Backstage Pass segment from Aug. 23, Motley Fool contributor Jeremy Bowman breaks down Alibaba's first quarter and digs into the stock's prospects for a recovery.

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Jeremy Bowman: I'll get to Alibaba. Before we talk about the earnings, I just wanted to introduce some of the regulation stuff we talked about. So I think Alibaba kicked off this whole panic, or whatever we want to call the market sell-off.

Around last October, Jack Ma, who is the founder of Alibaba, made some disrespectful comments at a public forum about some Chinese finance officials, or their general attitude. He accused them of having a pawn-shop mentality, and so as a result of that, or at least this is how it was portrayed in the media, they blocked the IPO of Ant Group, which is Alibaba's financial sister company, and Alibaba owns one-third of the stake from that. Then Jack Ma was hiding out or laying low, and that was a pretty big news story. He eventually resurfaced during that time.

The antitrust regulator in China announced an investigation. That was in December. Alibaba stock plunged on that news. Then a few months later, they slap a fine of $2.8 billion. That was in April. The stock actually went up on that news, because investors kind of thought that the worst was over. The stock has continued to decline since then, as we've had other regulatory-related issues with Didi Global and the education stocks.

That catches us up to, I think this is Alibaba's fiscal first quarter, which it reported earlier this month. So let's get to the numbers there. First-quarter revenue was up 34% to $31.9 billion. That was a bit short of estimates of $32.5 billion. Organic growth, which is not from acquisitions, was up 22%. The difference there was they consolidated Sun Art, which is a big-box supermarket in China, like a Walmart-type store. Alibaba already owned part of it. They took a majority stake in the company last October, so now they're including it in their financial results.

Brian mentioned customer base with JD. Annual active customers with Alibaba is up to 1.18 billion. That was up 45 million from the prior quarter, and that includes 912 million in China and also 265 million outside of China, which is a pretty large number. [laughs] It's about 80% of all of the U.S. Those are primarily from Lazada, which is their competitor to Sea Limited in Southeast Asia. That's an e-commerce business. And AliExpress with this international-facing version of their Chinese marketplaces.

Like we talked about with JD.com, Alibaba's profitability shrunk a bit. Adjusted EBITDA was down 5% to $7.5 billion. The company cited increasing investments across a wide variety of businesses. Adjusted EPS, earnings per share, was still up 12% to $2.54. That was ahead of estimates. They also increased their share-buyback authorization from $10 billion to $15 billion. So that could be a sign that management thinks the stock is undervalued and is planning to repurchase more stock.

So I think, overall, it was an OK report. They're still growing pretty well. Might be a little disappointing that top-line growth wasn't faster, considering the investments they're making, but the stock is -- I should mention I do own some Alibaba stock, and the stock has been hard to watch. You think it's going to hit rock bottom and it keeps going lower. I don't know when that's going to happen to me. I think the P/E ratio right now is getting close to 15. If it weren't a company in China, I'm sure it would be trading higher, because the fundamentals of the business are still great, but I think given the prior history with Jack Ma, they've already been kind of slapped on the wrist once, so I think investors seem pretty scared that they're going to face more restrictions.

Jeremy Bowman owns shares of Alibaba Group Holding, JD.com, and Sea Limited. The Motley Fool owns shares of and recommends Alibaba Group Holding, JD.com, and Sea Limited. The Motley Fool has a disclosure policy.


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