- Alibaba still trades below its first post-IPO trade of almost $94.
- Alibaba earnings Q2 2016 is scheduled for release on Oct 27 before market open.
- Results will depend heavily on how China’s consumers dealt with the last quarter’s industrial slowdown.
- The number to watch is 54 cents/share in net income.
The rise and fall of Alibaba (NYSE:BABA) has been one of the great business stories of the year.
It came public exactly 13 months ago, with the first trade at nearly $94/share, as executive chairman Jack Ma watched proudly from the floor of the New York Stock Exchange. After a sharp rise built around “Singles Day,” a made-up holiday created to get young Chinese to treat themselves, the stock began a long slide down, and traded below $60 late last month. Now it’s back in recovery mode, and opened for trade Monday at about $76. Why?
Alibaba remains the most disruptive force in the Chinese economy, and a huge profit machine. It managed to bring one dollar of every four it brought in as revenue, during the last quarter, to its operating income line -- $832 million out of $3.265 billion. That top line this quarter should be depressed a bit by the lower value of the Chinese Yuan against the dollar, but it’s still growing at 25% year-over-year, and it should do that this quarter easily.
Analysts are expecting Alibaba earnings Q2 2016 to come in at 49 cents per share, on revenue of $3.43 billion, again adjusting for the Yuan’s recent price of 6.2 to the dollar. That’s a deceleration of top line growth, which Alibaba managers guided to earlier in the quarter.
Profits were 54 cents last quarter, and analysts are only expecting 49 cents in tomorrow’s report. But there is a “whisper number” of 54 cents, and if the company can beat that, the stock could make a big run up.
What people don’t know is exactly how the Chinese consumer did last quarter. There have been anecdotes, most notably from Apple (NASDAQ:AAPL) CEO Tim Cook, that China’s consumer economy is continuing to grow, despite a slowdown in its industrial production. The country’s economic policy has also become accommodative, hoping to achieve a “soft landing” on a lower growth trajectory, something that is very rarely achieved.
But if China is to do that, consumer strength is the key. And that should be reflected at Alibaba, as well as online mall competitors such as JD.com (NASDAQ:JD), whose stock has also recovered somewhat this month, although not to the degree of Alibaba stock.
What investors need to understand about Alibaba, however, is that it was built as a business to business marketplace, not an online mall (although Alibaba’s TMall online shopping site is very large). Its growth is driven by helping small producers reach markets, both domestic and international, wholesale and retail. So if the low end of China’s industrial market is in trouble, the bulk of Alibaba’s business will reflect it.
That’s one reason why Alibaba has been investing heavily in its cloud play, Aliyun, investing $1 billion, building two U.S. data centers, and joining with local partners to enter the Middle East, Singapore, Japan and Europe. A growing backlash against U.S. laws covering the Internet, unveiled by former NSA analyst Edward Snowden, is moving many countries to demand that local data be hosted locally, and keeping Chinese companies from using U.S. cloud facilities. But however much revenue Aliyun delivers this quarter, its heavy capital expenditure is going to be a negative for profits. Alibaba is also copying Amazon's (NASDAQ:AMZN) moves into video, which will create further demand for Aliyun.
Alibaba bulls may be buying in expectation of a big third quarter, during which it hopes to repeat the success of its “Singles Day” promotion on November 11 (11.11 – get it) into a global marketing event now called a Global Shopping Festival. Most analysts now rate the stock a “buy” with a one-year price target of $91, still below its first trade after the IPO but a 15% gain from where it is.
The guess here is that Alibaba beats estimates and starts that run tomorrow.