Alibaba’s operating margins could decline in the future

Alibaba (BABA) reported a non-GAAP EBITDA margin of 58% in the quarter ended December 31, 2014, as compared to 60% in the quarter a year ago. Comparatively, Amazon’s (AMZN) EBITDA margin improved from 5.6% in 4Q13 to 6.3% in 4Q14. However, eBay’s (EBAY) EBITDA margin dropped a little from 30.5% in 4Q13 to 29% in 4Q14.

Alibaba’s Operating Margins Could Decline in the Future

The year-over-year decrease in Alibaba’s non-GAAP EBITDA margin was primarily due to the consolidation of newly acquired businesses UCWeb and AutoNavi. Decline in operating margin was also due to investments in new business initiatives, such as a mobile operating system, local services, and digital entertainment.

Alibaba acquired UCWeb, a leading provider of mobile Internet software technology and services, in June of last year. It is one of the biggest mobile web browser companies in China, with more than 50% market share. Previously, Alibaba acquired AutoNavi Holdings, a Chinese digital and online map company, for $1.58 billion. Autonavi is China’s fourth most popular mapping service, according to the research firm Enfodesk.

The quarter-over-quarter increase in non-GAAP EBITDA margin from 51% in the quarter ended September 30, 2014, was primarily due to operating leverage in this seasonally strong quarter.

EBITDA margins will continue to decline

During the earnings conference call, management said that the discretionary market spending on new initiatives such as local service, mobile OS, and digital space will be the strategic priority areas for Alibaba to drive future growth. Plus, the spending will likely continue at similar or greater levels in future quarters. As a result, EBITDA margin will fall.

Management emphasized the fact that the company doesn’t wish to manage the margin target, rather it will continue to invest optimistically for the overall growth of the entire ecosystem.

For diversified exposure to Amazon, investors can consider an ETF such as the Consumer Discretionary Select Sector SPDR (XLY). XLY invests 6.3% of its holdings in Amazon. For a diversified exposure to Chinese stocks, investors can consider ETFs such as the iShares China Large-Cap ETF (FXI). This ETF invests in the largest companies in the China equity market. The financial services sector makes up 39% of the FXI portfolio.

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