Alibaba sales surge, but profits disappoint

Alibaba Group Holding Limited (BABA) shares dropped by as much as 2 percent in pre-market trading after the company on Tuesday announced its first financial results since launching the biggest initial public offering ever earlier this year.

Revenue for the period ending September 2014 was $3.3 billion, a 54 percent year-over-year increase and well above the $2.6 billion analysts expected. However, net profit was down nearly 39 percent at $494 million. The company attributed the drop to share-based employee compensation, an increase in amortization of intangible assets, and increased tax liabilities.

"We delivered a strong quarter with significant growth across our key operating metrics," said CEO Jonathan Lu. "Our business continues to perform well, and our results reflect both the strength of our ecosystem and the strong foundation we have for sustainable growth."

Revenue grew in line with an increased number of users. Annual active buyers hit 307 million, a 52 percent year-over-year increase, a reflection on Alibaba's focus on growth. The average monthly number of mobile users hit 217 million, showing that the company has capitalized well on the technology trend.

Shares had been up by nearly 4 percent in anticipation of the earnings announcement. Once the numbers were released, trading first flattened in a more muted response and then trended down as word of the results spread before the markets opened.

Alibaba's record $25 billion IPO showed that expectations for the company's performance are high. In high-tech, that implicitly means anticipation of continued growth. But the company will need long-term growth on the order of 35 percent to justify that level of valuation. Only 9 percent of Alibaba's revenue comes from international sales, a percentage it will likely have to enlarge to maintain growth.

The Chinese e-commerce matchmaker between buyers and sellers did see a 49 percent year-over-year increase in a measure it calls gross merchandise volume, which reflects the total value of confirmed product and service orders in the company's marketplaces, whether or not the transactions are actually consummated. Almost 36 percent of the volume came from mobile users.

A 54 percent jump in revenue is nothing to dismiss. But while net profits met analyst expectations, those forecasts were fairly modest. The higher top-line growth made the profit performance look worse in comparison.