Amid investor uncertainty about the state of China’s economy and the effect of trade tensions, Alibaba Group Holding Ltd. will provide its take about consumer spending in the country Wednesday.
The Chinese e-commerce giant is due to report fiscal third-quarter results before the market opens Wednesday. The company’s holiday-period results will show whether it suffered as well from a general deceleration in e-commerce spending, which the Chinese government reported for the December quarter.
Baird analyst Colin Sebastian said that Alibaba
might be more immune than others to some of the macroeconomic issues impacting spending levels in the country, as big-ticket items like electronics and appliances have been among the categories most affected by China’s slowdown. Still, he recently trimmed his estimates for Alibaba’s March-ending fiscal year “to reflect a less supportive China macro backdrop.”
Sebastian noted that growth picked up a bit in the month of December, so investors should pay close attention to management’s commentary about spending backdrops for signs of a rebound. He rates the stock at outperform with a $178 target price.
What to expect
Earnings: Analysts surveyed by FactSet project that Alibaba recorded $1.69 in adjusted earnings per share for the December quarter, up from $1.63 a year earlier. According to Estimize, which crowd sources estimates from hedge funds, academics and others, the average projection is for $1.67 a share in earnings.
The U.S. dollar currency estimates on FactSet convert RMB to dollars at the time that analysts issue their notes, which can lead to inconsistent currency conversions with figures Alibaba provides, since the company uses the conversion rate from the last day of the quarter. On a Renminbi basis, the FactSet consensus calls for 11.42 RMB in earnings per share, up from 10.26 RMB a year earlier.
Revenue: Analysts tracked by FactSet call for $17.6 billion in fiscal third-quarter revenue, up from $12.8 billion a year ago. The Estimize consensus is for $17.3 billion. In Renminbi terms, analysts surveyed by FactSet call for 119.1 billion RMB in December-quarter revenue, compared with 80.3 billion RMB in the year-earlier period.
Stock movement: Alibaba’s American depository shares have risen after five of the company’s last 10 earnings reports. The shares are up 11% over the past three months, compared with a 0.7% drop for the S&P 500 index
. Of the 53 analysts surveyed by FactSet who track the shares, 52 have buy ratings and one has a sell rating. The average target price is $204.27, 28% higher than recent levels.
What else to watch for
Alibaba’s cloud computing business will be in focus again this quarter, though it represents a small portion of the company’s overall revenue at roughly 7%. “We believe the company’s focus in cloud remains growing customers and market share and not profitability,” wrote RBC Capital Markets analyst Mark Mahaney, who rates the shares at outperform with a $200 price target.
Margin commentary around the cloud business and other areas of Alibaba are of key interest to MKM Partners analyst Rob Sanderson, who expects that Alibaba’s competitors are going to cut their “spending intensity” for the current calendar year. He’s interested in Alibaba’s spending plans around video content and food delivery, both of which are drags on the company’s margins.
As for Alibaba’s cloud segment, Sanderson predicts that the business is “approaching its margin pivot.” He has a buy rating and $245 target on Alibaba shares.
Analysts are also looking for updates about the company’s “new retail” initiatives, which are focused on merging online and offline commerce. The company runs Hema grocery stores that are modeled on the online/offline concept, and Jefferies analyst Karen Chan is interested in the steps Alibaba might take to help with the long-term margin profile of these efforts, which, in her view, could include a delivery fee for each online order. Chan rates the shares a buy with a target price of $195.
The holiday-quarter included Singles Day, the biggest shopping event of the year. Alibaba made efforts to incorporate Ele.me, its food delivery business, and Hema, the “new retail” grocery stores, in its Singles Day offerings. Look for updates from management around whether the shopping extravaganza has had lasting effects on the usage of these Alibaba services.
Also watch for commentary around Alibaba.com, the company’s business-to-business platform. Alibaba has been making enhancements to the platform in order to make it more like a marketplace, in the model of its Tmall and Taobao consumer sites.
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