Earnings Preview: E-commerce Giant Alibaba To Report Thursday Morning

Alibaba Group Holding Inc. BABA reports fiscal first-quarter earnings before market open on Thursday, August 23. After the stock almost doubled in 2017, it is pretty much flat so far this year, despite a lot of volatility in 2018. 

For the quarter, BABA is expected to report adjusted EPS of $1.21 on revenue of $11.8 billion, according to third-party consensus analyst estimates. In the same quarter last year, the company reported adjusted EPS of $1.15 on revenue of $7.29 billion. 

BABA’s year-over-year revenue growth has been 54 percent or higher for eight consecutive quarters, topping out at 61 percent year-over-year growth in its most recent report. Analysts are forecasting a 62 percent revenue increase  for this report, which would make it BABA’s fastest growth in more than four years.

On a broad level, there has been several factors weighing on Chinese stocks this year: concerns that China’s economy won’t be able to maintain rapid economic growth, escalating trade tensions between the U.S. and China, and increased action by Chinese regulators to crackdown on online content.

The Chinese Yuan has also depreciated sharply against the dollar since April 2018, which will impact BABA’s dollar-based metrics in this report.

Retail Operations

BABA has grown more diversified over the years, but its core commerce operations still generate a majority of its revenue and accounted for $8.18 billion of its $9.87 billion in revenue when  it last reported.

In the company’s most recent report, annual active consumers on BABA’s China retail marketplaces was 552 million, 37 million more than at the end of December 2017. Mobile monthly active users increased by 37 million to a total of 617 million. 

Other Operations

Beyond BABA’s core commerce, its cloud computing division has been a consistent focus among analysts and investors. Revenue in this segment increased 103 percent year over year to $699 million. Analysts are forecasting the company will be able to maintain more than 100 percent growth for the quarter in this division as BABA expanded services.

While the company’s revenue growth has been stable in recent quarters, profits haven’t been growing at the same pace as the company has continued to invest heavily. In April, BABA fully acquired food delivery platform Ele.me. In May, BABA’s logistics unit Cainao Network and other investors bought a 10 percent stake in shipping and logistics company ZTO Express (ZTO) for $1.38 billion. 

And in July, BABA invested $1.43 billion to acquire a minority stake in Focus Media, a Chinese advertising company, and said it would potentially acquire as much as an additional 5 percent stake. 

Similar to past quarters, analysts say they are expecting this streak of deal making to weigh on short-term profits.

Up and Down. After substantially outperforming the S&P 500 (SPX) in 2017, BABA is trading around the high $170 level, where it started the year. The stock has pulled back sharply from its all-time high of $211.70 that it hit in early June 2018.  Chart source: thinkorswim^® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Alibaba Options Trading Activity

Options traders have priced in a 5.1 percent stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim^® platform. Implied volatility was at the 66th percentile as of this morning.  

In short-term trading at the August 24 weekly expiration, calls have been active at the 180 strike price, although there’s been higher volume at many strikes from the 175 strike up to the 190 strike. Volume has been lighter on the put side and concentrated at the 170 strike price. 

At the next monthly expiration on September 21, recent trading on the call side has been heavy at the 180 and 190 strikes. Again, volume has been lighter on the put side and concentrated at the 165, 170 and 175 strikes. 

Overall during Tuesday’s session, traders were leaning towards the call side with a put/call ratio of 0.443.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

image source: Daniel Cukier via flickr