Alibaba Earnings: Can The Earnings Growth Keep Up With Topline Growth?

  • Alibaba's revenue is growing rapidly but earnings are slowing.
  • Investors are worried about the company and the Chinese economy.
  • The stock trades at just $1 above its 52-week Low.
Alibaba Earnings Q1 2016

Alibaba Group Holding Limited (NYSE: BABA) is expected to report quarterly earnings on Wednesday, August 12, 2015. Seven analysts surveyed by Zacks Investment Research forecast Alibaba earnings to come in at $0.41 for the quarter. EPS for the quarter is expected to be about 50% lower than the same quarter last year, which came in at $0.84 per share.

It is noteworthy to see earnings fall substantially while revenue has been steadily climbing at a very fast pace of 45-50% annually. Previously, earnings nearly tripled from 2013 to 2014, climbing from $1.35 billion to $3.71 billion.

Investors have become increasingly concerned that the company will be unable to meet the super fast earnings growth rates it has seen in the past. Starting with the quarterly earnings announced on January 29, 2015, the company reported that the monetization growth rate had fallen substantially, a major headwind for future sales growth. The hype when Alibaba went pubic was based on the huge potential of the Chinese economy. However, sentiment has soured considerably in 2015.

The falling Chinese stock market in recent weeks has added to this sentiment, sparking fears that the entire Chinese economy may be slowing down further. When they report next week, investors will listen to what they have to say, not just about their company, but also about the Chinese economy and the current state of consumer spending.

Last quarter Alibaba beat on revenue and earnings. The stock surged 20% to $95 within 3 weeks before sliding down to a low of $76 on July 8. In spite of continued fast growth in revenue, BABA stock is down 34% from its 52-week high of $120 set on November 13, 2014. With the exception of the 3-week surge after last quarter's earnings report, BABA stock has steadily declined from the 52-week high. Today it is trading at $78.80, just $1 above its 52-week low.

Unlike most American companies, Alibaba refuses to give forward guidance. This will likely create additional volatility by decreasing the accuracy of analysts' estimates.

Yesterday, Alibaba announced that Michael Evans has been appointed President of the company. Evans is a former Goldman Sachs executive who worked with Alibaba to take the company public. He has been an independent director on the company's board since September 2014 when Goldman managed the company's initial public offering for a record $25 billion. His appointment makes him the most senior foreign executive in the firm.

What we have seen in Alibaba's stock this year is typical of a high multiple price-to-earnings ratio attached to a growth company. When the company stops growing at fast rates: the stock crashes. Alibaba stock has been beaten up badly and yet continues to show tremendous potential for the future. The Chinese economy has much room for growth with the large population they have. Their economy has plenty of room for development and yet they now have the second-largest economy in the world, second only to the United States.

In addition to other investors, I will be listening carefully to what Alibaba says and the numbers they report next week. Now is a good time to be skeptical and cautious before buying BABA stock.

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