Is Alibaba Stock A Risky Bet Now, Ahead Of Q2 Earnings? Alibaba Group Holding Ltd (BABA)

  • Alibaba is scheduled to report its Q2 2017 earnings on 2nd November.
  • Alibaba will post strong earnings as Chinese eCommerce market continues to show strength.
  • Alibaba stock has strong momentum going into this quarter.

Alibaba (NYSE:BABA) stock has returned more than 25% YTD and more than 70% since mid-February. While Alibaba stock has continued its northward journey, there are many skeptics who have questioned its continued run. The strong run in last one year has stretched Alibaba's valuations. Alibaba stock is trading at a forward PE of 24.61 and a PS ratio of 15.27. The EV/EBITDA ratio stands at 41.64. Short interest in the stock is up 52% this year, as the number of skeptics is growing. There are also concerns around whether Alibaba will be able to maintain strong growth in the coming quarters.

Many analysts have also questioned Alibaba's corporate governance practices. The well-known short seller, Jim Chanos has argued that Alibaba's accounting practices are not exactly transparent. Even the SEC had initiated an investigation into Alibaba's accounting practices. Alibaba has also been accused of not doing enough to fight fake listings on its sites. But in spite of these concerns Alibaba stock remains a good buy.

Also read: Alibaba Stock Is Due For A Correction Now

Chinese Economy Continues To Show Strong Growth

It has been a year since fears of a hard landing for Chinese economy roiled financial markets all over the world. Since then, the market has recovered as the fears have receded. China has posted strong GDP growth in past couple of quarters (comparatively). In Q3 the Chinese economy grew by 6.7%, in line with the government's projections and higher than what some of the critics had projected. China is also in process of transforming from an investment led economy into a consumption-led economy. All these factors will act as a tailwind for Alibaba.

Led by the strong overall economy, Chinese retail sales saw a robust growth in the latest quarter. Retail sales grew by 10.2%, 10.6% and 10.7% in July, August, and September respectively, higher than the growth posted in the previous quarter. Online retail sales grew by 25% YoY in the latest quarter. In the previous quarter, Alibaba posted a strong online retail sales growth in spite of headwinds. Expect Alibaba to post strong sales in the current quarter too.

Will Cloud Breakeven?

Alibaba's cloud business has been growing at exponential rates. In Q1 Aliyun reported 156% increase in revenues and improved its EBITDA margin from -76% to -13%. Alibaba expects Aliyun's profitability to improve with the increase in scale. The strong growth in cloud computing was lead by paying users, which more than doubled in Q1 on yearly basis. Revenue and profitability will continue to grow as more and more customers start using the complex analytical tools which Alibaba provides for its cloud customers. Investors should watch out for a break even in the cloud computing business. Goldman Sachs pegs Aliyun's valuation at $42 billion, 10 times the expected 2020 revenue.

Mobile Monetization Continues To Show Strong Growth

Mobile monetization has been key to the Alibaba story. Alibaba's mobile take-rate came in at 2.8% surpassing the desktop take rate for the first time. The revenue per mobile user has continued to grow and came in at $21 in the previous quarter. Mobile Taobao enjoyed a DAU Vs MAU ratio of 40% and users launched the app 7 times a day on an average. The mobile segment has come a long way since the IPO. To quote Jack Ma from his recent letter to investors:

"mobile revenue accounted for a single-digit percentage of total revenue from our China retail marketplaces; in our most recent quarter, mobile contributed more than 75% of total revenue. Our mobile monetization rate now exceeds that of the desktop, making Alibaba Group the largest mobile commerce company in the world."

Ant Financials IPO

Ant Financial recently appointed Eric Jing as the new CEO to steer the company going into the IPO (expected to be in 2017) . The latest round of funding values Ant Financial at $60 billion. The valuation of $60 billion is quite aggressive, giving it a forward EV/EBITDA multiple of 22. Alibaba shareholders must look out for any commentary regarding the IPO and valuations.

Ant Financials was earlier Alibaba's subsidiary. It was hived off from Alibaba in 2010, in spite of objections from shareholders like Yahoo (NSDQ:YHOO), citing regulatory reasons. The dispute was eventually settled via an arrangement that granted Alibaba a proportion of Alipay’s income. Alibaba is entitled to 37.5% of Ant’s pretax income but is allowed to exchange that for a 33% stake when Ant goes public, conditional on regulatory approval. A higher valuation will act as a tailwind for Alibaba stock. CLSA pegs its valuation at $75 billion.

Conclusion

The Chinese eCommerce giant Alibaba is scheduled to report its Q2 2017 earnings on 2nd November. The company had posted solid first quarter numbers and analysts expect Alibaba to continue the performance in the second quarter as well. Analysts expect Alibaba to report an EPS of $0.7 on revenues of $5.04 billion. This represents a revenue growth of 44% YoY and a 22% growth in EPS. Alibaba stock has returned more than 25% in last one year. The stock had recently hit a 52 week high at $109. While the stock has climbed down since then, a strong earnings report could push to stock above its 52-week highs. According to a report in Barron's, Alibaba stock is worth $130. Alibaba stock is a good buy going into earnings.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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