Will Q3 2016 Earnings Bring Some Cheer To Alibaba Stock?

Know more about Alibaba stock in our detailed Alibaba Q3 earnings report

  • Alibaba is due to report Q3 FY 16 results on January 28th, 2016.
  • Analysts expect the eCommerce giant to report upbeat earnings.
  • Will Alibaba stock finally get some much-needed reprieve?

Giant Chinese online company Alibaba (NYSE:BABA) is due to report third quarter fiscal 2016 earnings on 28th January 2015 before market open (Alibaba’s fiscal year begins in April). Wall Street consensus points to the company reporting non-GAAP EPS of $0.69, representing 25.5% Y/Y growth. Curiously, Alibaba does not usually provide any earnings or revenue guidance during its earnings calls. Looking at the company’s earnings history, Alibaba has missed on earnings estimates on three out of the last four consecutive quarters, the last quarter being the exception after it topped non-GAAP EPS expectation of $0.32 by $0.06.

Alibaba Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
Sep2015 10/27/2015 0.38 0.32 18.75
Jun2015 08/12/2015 0.34 0.41 -17.07
Mar2015 05/07/2015 0.2 0.28 -28.57
Dec2014 01/29/2015 0.55 0.62 -11.29


Alibaba stock has remained depressed as investors became increasingly disgruntled by the company’s top line performance. Alibaba’s revenue growth has slowed down from mid-40s percentage to low 30s in less than two years. During the Q4 FY 15, Alibaba reported revenue growth of 45% but only 28% for Q1 FY16. The company’s top line recovered a bit during Q2 FY 16 when the company reported revenue of RMB22,171 million (US$3,488 million), a 32% Y/Y increase. Alibaba’s GMV, or gross merchandise volume growth, however, remained stuck at just 28%. GMV growth is a closely watched metric for companies like Alibaba because it acts as a barometer of the popularity of an eCommerce platform.

Unfortunately for Alibaba, its GMV growth has also been slowing. GMV growth in FY 15 was 40% implying that this metric has slowed down pretty dramatically. A lot of the slowdown can be chalked up to the slowing Chinese economy though the common view in investor circles that the Chinese economy is about to implode is greatly exaggerated.

Recent analysts’ checks have found that Alibaba’s business has not been significantly impacted by the Chinese stock market volatility. Evercore’s Ken Sena surveyed 1,000 Alibaba shoppers and another 1,000 Alibaba sellers. Sellers reported an average 15.7% Y/Y GMV growth during the December quarter compared to 13.8% growth during the September quarter. 82% of respondents said that Alibaba still provides the highest ROI among Chinese eCommerce platforms. Evercore has an $88 price target on Alibaba stock, about 25% higher than the current price.

ITG Research has also reported that Alibaba’s Q3 GMV is tracking higher than expectations.

Alibaba stock is down 13.4% YTD and 32.3% over the past one year. The huge selloff looks like an overreaction considering that Alibaba is still growing its top and bottom lines at a healthy clip. It all boils down to how investors perceive investing in Chinese stocks as a risky venture due to the danger of the Chinese economy collapsing. The sad fact is that it will take years for this sentiment to change. Alibaba is widely viewed by investors as the best way to play the growing Chinese middle class, but few investors are willing to buy the growth story when headlines about a slowing Chinese economy continue dominating news feeds.
BABA stock chart

Source:Alibaba Stock Price Data by amigobulls.com

The biggest real threat to Alibaba stock is not unfavorable macroeconomic forces, but rather the company’s growth strategy. Few investors have noticed how Alibaba has recently been investing heavily in O2O, or online-to-offline, ventures. Alibaba recently announced that its investing $1.27B in Ele.me, an O2O food delivery service. This will become Alibaba’s largest O2O investment. Other O2O investments by Alibaba include taxi app Didi Kuaidi, mobile payment platform AliPay and its partnership with Suning.

O2O is a rapidly growing business in China. But in the short-term, it’s bound to place a lot of pressure on the margins of eCommerce companies because players in this space have not yet started monetizing the service. Alibaba seems to be chasing Baidu (NASDAQ:BIDU) whose O2O business is well ahead of its own. Incidentally, heavy O2O investments are the reason why Baidu’s margins have come under a lot of pressure lately. Alibaba could soon follow suit.

Investor Takeaway

Analysts’ checks on Alibaba’s business seem to suggest that it’s doing just fine and could exceed expectations when the company reports Q3 FY 16 earnings. It, however, remains to be seen whether investors will finally cut the company some slack and view it in a more positive light. The general negative perception surrounding Alibaba stock and other Chinese stocks could keep it depressed longer than many investors can tolerate.

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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

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The author may not be a qualified investment advisor. The opinions stated in the post 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.

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