Alibaba’s Revenue Growth, Almost Too Good to Be True, Hits a Slight Rough Patch

Alibaba's (NYSE: BABA) revenue growth story has seemed impossibly good these past few years. The slowdown in China's economy has presented a slight bump in the road for the company. But thankfully for Alibaba investors, its off-quarters are still much better than most companies' best quarters in terms of revenue growth.

In fact, last quarter was the retail company's 10th straight quarter in which it posted more than 50% year-over-year revenue growth, and it comes at a time when China's economy is growing at its slowest pace since 2009. That's why many investors see Alibaba's growth as nearly untouchable.

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Consistently impressive

Alibaba just hit its 20-year anniversary in September, yet its revenue growth is still on fire even in the midst of tough economic conditions. As you can see in the chart below, Alibaba reported 54% revenue growth for the fiscal 2019 second quarter against the prior-year quarter. For comparison's sake, Amazon (NASDAQ: AMZN) reported more modest 20% growth in the second quarter of 2015, which marked its own 20-year anniversary.

Quarter Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019
Revenue Growth (YOY) 56% 61% 56% 61% 61% 54%

It's fun to compare Amazon and Alibaba because they're both the biggest e-commerce companies in their respective countries. But Alibaba does have a key advantage -- its core audience is China's population of 1.4 billion people, while Amazon's main audience is the much smaller U.S. population of about 325 million people. In addition, Amazon's enormous $197 billion e-commerce revenue makes it harder to grow so fast, vs. Alibaba's $42 billion e-commerce revenue. And it's important to note that although Alibaba's e-commerce business is smaller than Amazon's in terms of revenue, it's still far more profitable.

A slight rough patch

With the company's 10 quarters of over 50% revenue growth, it's hard to remember that this is actually a bumpy stretch for Alibaba. In fact, although its 54% revenue growth last quarter sounds impressive, Alibaba's quarterly revenue of $12.4 billion actually fell short of estimates -- surprising for a company that has continually blown away estimates over the past few years.

That's because while Alibaba is an enormous company, it hasn't been immune to the current negative macroeconomic conditions in China -- namely, a trade war with the U.S. and a dip in its stock market. In October, China's quarterly economic reporting showed that its economy grew at its slowest pace since 2009. These issues help explain why Alibaba's shares have dropped over 25% in the past three months.

To account for these rough patches in the economy, Alibaba lowered its revenue forecast by 4% to 6% in yuan terms for the financial year that ends in March 2019. While it's impossible to predict when the economy will return to an upswing, it's important to remember that Alibaba is 19 years old and has already weathered two similar dips in the global economy. That means it can withstand this current economic storm, too.

If anything, investors should be encouraged that Alibaba is still posting revenue growth above 50% during tough economic times. This proves the company has strong fundamentals. In fact, Alibaba's net income rose 13% year over year last quarter, crushing analysts' estimates. So while we might not see 60%-plus revenue growth over the next few quarters for Alibaba, its growth story is far from over.

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