Alibaba To Report Q1 Earnings With U.S.-China Woes Unresolved

As Chinese online retailer Alibaba Group Holding LTD BABA forges into new markets in recent months, it’s been facing a few forces from a couple directions.

On the one hand, its shares have lagged seemingly in tandem with negative news on the U.S.-China trade front, an issue that’s been dragging on for nearly a year now. On the other hand, China’s consumers seemed to still be in spending mode even as the country’s overall economy is slowing, and of course strong spending is key for retailers.

With its next quarterly earnings around the corner, investors might see whether the growth it welcomed in Q4 has continued into this fiscal quarter along with improved consumer spending, or whether the ongoing tariff tensions between the U.S. and China a more significant impact on its bottom line. BABA reports before the opening bell Thursday.

In one possible clue to how things may go, earlier this week, BABA’s rival JD.com JD proved to be among the bright spots this earnings season as it swung to profits from a loss with revenue up 22%. If that’s any indication, the Chinese consumer may be helping offset any headwinds from the tariff issues—for now. We’ll have to see if BABA’s report reflects similar trends.

Consumers’ Wallets May Open Wider

Consumers in China are known to be among the world’s biggest spenders. Recently, even as new tariffs on U.S. goods are likely going to add to the cost of goods, they continue to have a “buy” mindset, according to a recent UBS survey. In fact, they say they plan to ramp up their shopping. One in five consumers in China said they plan to increase their spending over the next year, according to the May survey, which included 3,000 respondents.

Meanwhile, as a side note, China’s economy has been showing signs of weakening. For one, its GDP growth is expected by many analysts to slow to about 6.2% this year, after slowing to 6.6% in 2018.

As China’s dominant e-commerce company, BABA seems well positioned to buck the overall sluggishness and potentially take advantage of these positive consumer trends. However, again, it does have to contend with the tariff situation. And if the past year’s headlines are any indication, that can escalate on a whim.

So far, most of the issue surrounding tariffs has been threats and a stalemate. It’s only been about a month since the U.S. actually followed through with imposing tariffs on about $300 billion worth of goods, which were set to take effect in September. Now, some of those tariffs have been delayed until Dec. 15, and some items were removed from the tariff list altogether. So it may be another quarter or two before we see how the trade dispute plays out on BABA’s bottom line.

BABA’s Growing Markets

Meanwhile, BABA continues to make headway into other endeavors like cloud computing and multimedia services. Even as consumer trends have been shifting toward online purchases, BABA has been targeting the brick-and-mortar market, even delving into grocery delivery. It’s also reaching outside of China’s borders to try to expand internationally.

BABA recently said it will expand its business-to-business platform, Alibaba.com, to include U.S. businesses, expanding from its focus on allowing mainly Chinese suppliers. Still, while the U.S. suppliers will be able to connect to businesses around the world, the company hasn’t enabled the buying ability for Chinese companies. The U.S. business-to-business e-commerce market is about $23.9 billion, according to BABA’s cited data, which it said was U.S. government statistics.

Wall Street analysts who are bullish on BABA have cited its massive potential as a dominant player in a market flush with cash.

What’s in Store for BABA this Quarter?

Last quarter, BABA handily beat Wall Street’s expectations with $1.26 per share in earnings, up 50% from a year prior, and versus the 97-cent Street target. Revenue was up 51% year over year to $13.93 billion, verus the $13.3 billion analyst target.

Since then, BABA has seen a few changes. For one, it announced in mid-June that CFO Maggie Wu would take on a new role overseeing strategic acquisitions and investments. It was the first major executive shuffle since co-founder and former CEO Jack Ma said he was stepping aside as chairman.

It’s reportedly also considering launching a second listing in Hong Kong, according to reports from Bloomberg and CNBC, which cited “a person with direct knowledge of the matter.” Just five years after its record-breaking $25-billion U.S. IPO, it could possibly raise about $20 billion perhaps by the end of the year.

For Q1, BABA is expected to report adjusted EPS of $1.52, up from $1.16 per share in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $16.09 billion, up 38% from a year ago.

Year to date, BABA shares are up about 15% as of August 12, which is on par with the S&P 500 (SPX), but they’ve lost ground in recent months. See figure 1 below.

BABA Options Activity

Options traders have priced in a 5.2% stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Put options have been active at the weekly 150 and 160 strikes, while call option activity has been heaviest at the 170 and 175 strikes. Implied volatility was at the 39th percentile as of this morning. 

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.

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