After Amazon revealed its ambiguous result, all attention is focused on one of its closest competitors – Alibaba Group $BABA, which reports its Q3 earnings tomorrow, Friday (Nov 2). For those of you who are not familiar with Alibaba, it’s one of China’s biggest e-commerce companies. In fact, Alibaba controls around 60% of the Chinese e-commerce market through three websites: Taobao, Tmal and Alibaba.com. And on those sites, it has around 552 million active shoppers.
It has been a rocky road for Alibaba recently, as for most Chinese stocks listed on the NYSE. Concerns about the trade war, along with the announcement that founder Jack Ma is stepping down as CEO, have taken a toll on the stock, which is now -24% year-to-date.
Last year, Alibaba Group Holding Ltd posted a 54% rise in third-quarter revenue, beating analyst estimates of 48%, helped by higher sales during its Single’s Day shopping event and increased earnings in its cloud and digital media ventures. So what’s to expect this year?
Analysts surveyed by FactSet expect that Alibaba generated adjusted earnings per share of $1.06 for the September quarter, down from $1.29 a year earlier. Many Analysts lowered their price targets for Alibaba during the last couple of weeks, arguing that soft wage growth, tight lending and the fear of an intensified trade war could have hurt spending power in China during the third quarter. But most price targets still remain above $200. Jerry Lio, analyst at UBS, reduced his price target to $220 from $230 two weeks ago, stating that given the macro environment at the moment, consumer demand and online shopping might have weakened. $220 is still +47% from today’s levels.
Baird’s top analyst Colin Sebastian goes absolutely GAGA for BABA and reiterated an Outperform rating for the stock, with a price target of $215. That would mean a +43% upside. According to Sebastian there is optimism to be felt about the company’s long-term growth trajectory due to investments in new retail, cloud computing, and digital media. Though data revealing China’s consumer market shows it is slumping a bit, Sebastian says now is a good time to capitalize on China’s burgeoning middle class as online shopping, delivery services, and online entertainment are growing and monetizing.
“We anticipate $BABA will continue to prioritize investments in infrastructure and platform services. Moreover, we expect continued aggressive investments in content creation and licensing to support the growth of digital media assets”
One key issue in the earnings report, just as Sebastian talks about, will be how Alibaba’s spending on its long-term initiatives impacts results in the short-term. Jefferies analyst Karen Chan, who has a $225 price target on Alibaba, anticipates “soft profit” for the quarter due to the company’s “continued investment in new retail & content which helps strengthen Alibaba’s e-commerce foothold and deepen offline and online consumer wallet spending in the long term.”
More Tariffs from Trump?
It is important to remain cautious around the trade war between the US and China. Should it intensify, Alibaba’s shares could take a beating yet again. President Donald Trump has said tariffs on another $257 billion worth of imports from China are “ready to go”. But one can expect Alibaba to go for a run in the short term if Wall Street’s estimates are beaten.
Wall Street’s Estimates
Q3 Revenue (Average Estimate): $12.4B
EPS (Average Estimate): $1.06 /share