Can Alibaba Health Shares Rally Higher After Its Latest Results?

Alibaba Health Information Technology Ltd (SEHK: 241), otherwise known as AliHealth, has outperformed in 2020.

Since the beginning of the year, shares have approximately doubled. Given that Alibaba Health recently reported its final results for its fiscal year ended 31 March, 2020, can the stock continue to rally?

Here’s more on how Alibaba Health performed and what investors can expect going forward.

Fiscal year results

For the year ended 31 March, 2020, Alibaba Health’s sales rose 88.3% year-on-year to RMB 9.6 billion (US$1.35 billion).

The company’s group losses narrowed to RMB 15.7 million, versus a loss of RMB 91.8 million for the prior year as factors such as increased economies of scale have helped margins.

Its gross merchandise value (GMV) for the Tmall pharmaceutical e-commerce platform rose to over RMB 83.5 billion and annual active customers of that platform surpassed 190 million.

In February, Alibaba agreed to buy Ali JK Nutritional products for HK$8.075 billion to expand. The purchase will help Alibaba Health capture more market share in certain parts of the pharmaceutical industry such as foods for special medical purposes and pharmaceutical products.

Progress in AI

AI has the potential to really transform healthcare from everything from better efficiency to more accurate medical diagnosis.

If Alibaba Health makes a lot of progress in AI, its future growth rate could be faster and the company will be more competitive.

In terms of AI, Alibaba Health has made significant progress for the fiscal year. The company said:

“During the year, the Group continued to be committed to building an artificial intelligence (AI) medical system that can be applied in real-life situations, and successfully incubated the AI engine for brain health screening, utilizing the AI technology to conduct quantitative analysis on electroencephalograms (EEGs), so as to predict and screen risks relating to depression, Alzheimer’s disease and epilepsy. The AI engine has already been put into use in medical examination centers.”

For the coronavirus outbreak, Alibaba Health has also collaborated with other Alibaba units to develop AI tech to better help doctors conduct fast Covid-19 screenings.

Although AI isn’t a big revenue driver for Alibaba Health now, it could play a much bigger part in the future.

Growth stock

Alibaba Health is a growth stock, meaning much of the company’s value is expected to come from the future. Growth stocks are all about future profit potential.

Because potential is subjective, Alibaba Health’s recent history of execution plays a big part in deciding just how much potential investors think Alibaba Health has. How confident investors are that management will capture that potential also matters.

If management executes, margins improve substantially, the company makes good progress in R&D and sales grow rapidly, many growth investors will be more confident in the future and the stock will likely rally.

If growth or margin improvements fail to meet many growth investor expectations, the stock could decline, potentially sharply.

According to its fiscal results, Alibaba Health management has executed well. The coronavirus outbreak has helped with user sign ups and Alibaba Health also has competitive advantages in its brand, scale, and ally in Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988).

Long-term potential

In the long run, I think Alibaba Health has a lot of upside left given how transformative AI and information technology will be to the huge market that is China’s healthcare industry.

However, given the high valuation – according to Morningstar, Alibaba Health trades for a price-to-sales (PS) ratio of 22.8 – it’s going to require continued execution and I think the stock is only for investors who can take losses if the bull thesis doesn’t materialise.

Alibaba Health will also be prone to any changes in growth expectations. Because COVID-19 won’t remain a tailwind forever (given that China has successfully contained the coronavirus outbreak), Alibaba Health might not rally as quickly as it did in the first half of this year.

Foolish conclusion

Alibaba Health reported stellar results for the fiscal year ended 31 March, 2020. Going forward, the stock has a lot of potential but it’s going to require continued execution and investors will have to be willing to tolerate potentially a lot of volatility.