In the past 12 months, Chinese e-commerce company Alibaba [BABA] has seen its share price outpace both its US rival Amazon [AMZN] and the S&P 500, gaining more than 54%, where the latter gained 26% and 23%, respectively.
Strong diluted earnings per share (EPS) figures across quarters have been key to Alibaba’s share price growth over the past year, and many expect this to also be the case for Q3.
News of the Wuhan coronavirus has somewhat slowed the share price down this January, with its biggest drop occurring between 22-27 January when the company lost 7.6%. The share price has managed to recover in the first week of February, however, and it’s currently hovering at the $220 mark.
What happened in recent quarters
In Q2, Alibaba’s diluted earnings per share (EPS) rose by 246% year-on-year to $3.85, according to Investopedia’s Matthew Johnston. A week following the news, the e-commerce giant’s shares were up 5.7% and would continue to trend higher for the rest of the calendar year.
The figure followed an already impressive rise in diluted EPS for the company’s Q1 2020 earnings report, where the company saw growth of 135.4%, pushing the stock up by 10% in the five days following the news.
Elsewhere, revenue for Q2 came in at $16.65bn, an increase of 40% year-over-year. For Q1, it came in at $16.7bn, an increase of 42% year-over-year, suggesting a slowing growth in this department.
$16.65billion Alibaba's Q2 revenue - a 40% year-over-year increase
Alibaba's Q2 revenue - a 40% year-over-year increase
Annual active consumers, a key figure investors will be looking out for in Q3, came in at 693 million in Q2, an increase of 19 million from the previous quarter.
What’s expected in Q3?
Based on five analysts’ forecasts, the consensus EPS forecast for Q3 2020 is $1.87, according to Zacks Investment Research, up on last year’s Q3 EPS estimate of $1.39.
Johnston expects earnings to come in at $2.18 per share, while revenue is expected to come in at $22.8bn. Annual active customers are expected to rise to 718.7 million.
Investors will be particularly focused on Alibaba’s annual active consumers, according to Johnston, as the more people that use the platform, the more advertising revenue it can generate.
718.7million Expected annual active customers
Expected annual active customers
Is Alibaba’s rally just beginning?
Some options traders are betting that Alibaba’s stock will jump after the company reports its results on 13 February, according to Seeking Alpha contributor Mott Capital Management. This could mean shares rise to near $235, a gain of about 6.4% from its price of $220.90 on 6 February.
This is due to a combination of strong expected results and what Mott Capital Management says is a cheap valuation. The stock’s valuation stands at 24.6X one-year forward estimates, according to the firm, and when adjusting that multiple to its projected three-year growth rate, it looks cheap.
|PE ratio (TTM)||62.11|
|Quarterly Revenue Growth (YoY)||39.80%|
Alibaba share price vitals, Yahoo Finance, 12 February 2020
Is Alibaba a Buy?
GOV Capital, a public finance firm that makes stock recommendations using a custom algorithm, says Alibaba will be trading at $387.2 in the next 12 months, according to Capital.com. This means that if a trader were to invest $100 now, it would be worth $141 by February 2021.
This is somewhat backed up by consensus estimates on CNN Business. Out of 53 analysts offering 12-month forecasts for Alibaba Group, the median target price is $1,687, which would represent a near 680% increase from its latest price.
Out of 56 investment analysts, 50 consider the stock a buy, four an outperform and two a hold, according to data from CNN.