Alibaba Group Holding Ltd (NYSE:BABA) will report its Q2 earnings on Thursday morning. Will BABA stock see another post-earnings rally?
Jack Ma founded Chinese eCommerce giant Alibaba Group Holding Ltd (NYSE:BABA) will report its second quarter fiscal 2018 earnings on Thursday, before the opening bell. With more than 106% gains in the year-to-date, there are still high expectations from the online retail giant's latest earnings to propel Alibaba stock much higher. Trading action at the BABA counter has generally been largely muted in the lead up to the earnings announcement prior to the last trading session, which saw Alibaba shares spiking by more than 3% to close near its all-time highs.
Alibaba stock is trading in a similar pattern as before the last quarter earnings. Backed by robust growth in the core commerce segment and expanding cloud business, which drove strong revenue and profit growth in Q1 2018, will Alibaba Group Holding Ltd trump Wall Street estimates? Is Alibaba stock setting up for a strong post-earnings rally which will propel the stock past the psychologically important $200 mark?
Earnings to come under pressure?
There were some concerns among the investors when Alibaba announced its decision to consolidate the financials of its delivery arm Cainiao Smart Logistics Network Ltd which lead to a sell-off. Earlier this month too, SunTrust Robinson Humphrey analysts trimmed their earnings estimate for Q2 2018 by 5% but increased their price target for Alibaba stock at the same time. However, in our earlier coverage, we had clearly suggested that the concerns related to Cainiao investment may be overdone. Coming to analyst estimates, Wall Street expects Alibaba Group to report $1.03 in non-GAAP EPS, translating to more than 30% YoY growth. This though is lower than earnings of $1.17 per share, a 58% YoY growth, the Chinese eCommerce company had posted in the previous quarter.
On the revenue front, strong top-line growth is set to continue. Analysts expect the company to report revenues of $7.85 billion, 52.1% higher than what the company had reported in the year-ago same quarter. The revenue estimates are in line with the company's investor day guidance of 45%-49% revenue growth this year, in fact, even more bullish. Analysts are very bullish about the fact that strong revenue growth will offset any minor impact on the earnings. The overall market sentiment is still very bullish despite Alibaba stock doubling in 2017.
Alibaba Earnings History And Earnings Whisper.
Alibaba has a decent history of crushing Wall Street estimates, having missed consensus earnings estimates only twice in last 8 quarters. Also, the company has beaten the top end of Wall Street estimates in 3 of the last four quarters, implying that Wall Street is yet to warm up to the strong growth cycle the company currently finds itself in. Coming to revenue estimates, Alibaba has beaten the estimates in all of the last 8 quarters. The strong earnings history implies that Alibaba could be in for yet another earnings beat. The case for an earnings beat is also supported by the current Alibaba Q2 earnings whisper number, which is currently at $1.10, 7 cents higher than analysts estimate. Alibaba stock is known to make big moves in the earnings week, BABA stock made double-digit gains during the last quarter earnings.
Other factors to watch out for.
Alibaba stock is currently trading at a trailing twelve-month (TTM) price-to-earnings ratio 61x earnings, which isn't anywhere close to cheap. Given the massive expectations currently baked into the stock, a miss on the Q2 earnings release could see the stock give up some of the recent gains, though that which seems very unlikely at this moment. Alibaba needs to stick to its earlier revenue growth guidance of 45-49%.
At the segment level, investors should keep a close tab on the Cloud segment, which reached an important milestone of 1 million paying customers in the last quarter. Alibaba Cloud also has been very crucial to BABA stock growth story, investors would be expecting for the strong double-digit growth to continue. With Alibaba pledging multi-billion dollar investments in R&D over the next few years recently, any management commentary on those lines should be closely watched. Any major positive development in the company's cash burning Digital Media and Entertainment segment will be seen as a big boost to overall Alibaba growth story.
Playing Alibaba stock through Q2 earnings.
We believe that Alibaba stock is a solid long term buy, given that the company is riding the strong revenue growth in its core commerce segment, and Alibaba Cloud expanding at a rapid pace. Further, Alibaba stock technical chart is also flashing some bullish signals ahead of earnings. BABA stock saw a bullish crossover with its 20-day simple moving average along with a bullish Moving Average Convergence Divergence (MACD) indicator crossover in the last trading session. Earlier, Alibaba stock also made a bullish crossover with its 50-day SMA. The technical set up suggests that strong earnings could set the stock on another post-earnings rally. However, as a word of caution, considering the recent run-up in Alibaba stock price, profit booking following the earnings call cannot be ruled out. As some investors are still skeptical about the company's growth. However, given the recent rally in tech stocks on account of strong earnings performance, one cannot rule out the possibility of Alibaba stock breaching the $200 mark on the back of solid Q2 results.
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