Why Margins Are In Focus For Alibaba's Earnings

In a report published Sunday, Summit Research analyst Henry Guo previewed Alibaba Group Holding Ltd BABA's June quarter results (scheduled for August 12 before market open), noting that Street expectations for 34 percent year-over-year revenue growth is "achievable" and the company is expected to report its revenue in-line with expectations.

Guo said that Tmall GMV (gross merchandise volume) is expected to show a "modest" deceleration compared with the March quarter. Meanwhile, GMV for Taobao.com is likely to show a seven point growth acceleration due to the positive impact of the Chinese New Year and improving mobile advertising.

According to Guo, market sentiment heading into the earnings print is skewed towards the negative side due to: 1) ongoing concerns over China's economy and microenvironment competition, 2) margin pressures due to the company's "aggressive" investments and 3) mobile monetization challenges.

Guo expanded on margin pressures and stated that management's commentary on margins is likely to be the "focus" of the post-earnings conference call. Currently, the consensus estimate is calling for Alibaba to report a non-GAAP operating margin of 44 to 45 percent for the quarter – translating to a 5 percent year-over-year margin contraction.

"The majority of the margin contraction is due to the aggressive marketing and branding campaigns on Alibaba's mobile and O2O initiatives," Guo wrote. "Going forward, we expect the investments to continue, considering leading rivals' (Tencent and Baidu) recent aggressiveness in the space."

Shares remain Buy rated with an unchanged $97 price target.