Earnings

Will Alibaba’s share price record a post-earnings bounce?

Despite talks around the US-China trade war fluctuating throughout the year, Alibaba’s [BABA] share price has gained 16% this year to 9 August. 

The online business is faring well in the broader ecommerce industry, and its growth is likely to continue as the company expands its cloud computing reach. But will Trump’s latest bid to impose 10% tariffs on $300bn of Chinese goods affect its share price as it reports its earnings on 15 August?

 

How has the stock performed this year?

Alibaba has been delivering better-than-expected results this year and surpassed Wall Street expectations for its March quarter. Its revenue during this period rose 51% to $13.6bn and exceeded consensus estimates by $270m. Its March quarter earnings per share came in at $1.25, $0.30 above the consensus estimate.

Meanwhile, the firm’s full-year fiscal 2020 earnings per share figure is expected to pop 16%, with 2021’s figure projected to come in 27% higher than the current year estimate, according to Zacks’s Benjamin Rains. He also highlighted that Alibaba easily topped Zacks’s earnings estimates in the trailing three periods, by an average of 19%.

 

Earnings expectations for the June quarter

Wall Street expects Alibaba to report revenue of $15.9bn and earnings per share of $1.50 on 15 August. This time last year however the company missed its EPS target by $0.04, and those analysts that are more bearish point to the firm’s mixed track record for the June quarter.

 

Market cap $414.28bn
PE ratio (TTM) 45.50
EPS (TTM) 3.50
Quarterly Revenue Growth (YoY) 51.00%

Alibaba share price vitals, Yahoo finance, 12 August 2019

 

What new trade tariffs could mean for Alibaba

The trade war is hindering economic growth in China and many worry that new tariffs, especially those imposed on US goods in China, could impact purchasing power. As over 650 million Chinese consumers shop on Alibaba’s retail platforms, this could pose a real problem for the company. 

654million

Alibaba's annual active consumers

However, Alibaba execs have insisted a trade war is not impacting the business, saying in February that the tangible impact of the trade tariffs is minimal. The company also benefits from billion-dollar tax cuts introduced by the Chinese government to spark consumption.

Alibaba’s decision to pursue a joint listing in Hong Kong has added risk to the stock's buy case according to some analysts due to the renewed political unrest and potential market volatility that could be triggered by a move by China to abolish the “one country, two systems” policy.

 

A cloud with opportunity

Alibaba is creating new growth opportunities via its cloud computing business, which is attempting to take on the likes of Microsoft [MSFT] and Google [GOOG].

Traders will be watching for the company’s cloud revenue this quarter after Alibaba reported a revenue increase of 76% year-over-year to $1.2bn in the previous period. The firm’s cloud computing business contributed 8% to its total revenue in the quarter.

Alibaba has big plans for this part of the business, and has recently tripled its cloud computing capacity in India, in addition to expanding its efforts in Europe.

It’s a sizeable opportunity if Alibaba management can get the execution right, with just the public cloud market in China set to be worth a staggering $24.5bn by 2022. Synergy Research have Alibaba as currently the fifth top cloud vendor in the world, behind Amazon [AMZN], Microsoft, Google and IBM [IBM].

$24.5bn

Estimated value of China's public cloud market by 2022

 

Is Alibaba a ‘buy’?

Writing on InvestorPlace, Dana Blankenhorn said that although traders should hold off buying Alibaba stock during this volatile period, it is a stock worth buying on a longer-term time horizon.

“Trade wars are unhealthy for economies and other living things. This is true for all economies – China’s, America’s and that of the world. But wars do end. When they do, you’re going to want stability, a stake in the future of payments, software and the cloud, focused on the fast-growing markets of Asia and Africa,” he said.

Meanwhile, out of 23 tracked analyst firms, Nasdaq has 20 that consider the company a ‘strong buy’.

Despite the trade war, Jeffries upped Alibaba’s rating to a ‘buy’ on 5 August, citing its “strong cash cow model with huge potential.”

On the other hand, Steve Weiss of Short Hills Capital believes this is not a stock to play right now: “I sold just because you can’t have those kinds of trades in this kind of environment.”

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