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Will Alibaba (BABA) Q3 Earnings Top on E-Commerce Growth?

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Alibaba Group Holding Limited (BABA - Free Report) is set to report third-quarter fiscal 2018 results on Feb 1. Last quarter, the Chinese e-Commerce giant delivered a positive earnings surprise of 24%.

The surprise history has been good in Alibaba’s case. The company surpassed estimates in each of the trailing four quarters, with an average four-quarter positive surprise of 15%.

Coming to the price performance, on a 12-month basis, the company’s shares have rallied 103.2% compared with the industry’s gain of 68.1%.

Strength in Alibaba’s Core E-Commerce Business

This segment comprises marketplaces operating in retail and wholesale commerce in China, and international commerce. Revenues in the last-reported fiscal second quarter were RMB46.46 billion (US$6.98 billion), increasing 63% year over year. Revenues are expected to further increase, driven by innovation in data technology, widespread application of big data and increasing validation for Taobao and Tmall portals.

Strong Mobile Growth

In the fiscal second quarter, Mobile Monthly Active Users (MAU) were 549 million, reflecting an increase of 22% year over year and 4% sequentially. The number is expected to further expand, driving revenues for the company. This is because of the increased adoption of mobile devices by consumers as the primary method of accessing Alibaba’s platforms. 

Additionally, over the last few quarters, Alibaba has witnessed an increase in monetization rates. The company is building its online marketing inventory on both mobile and PC and is likely to continue witnessing higher monetization rates, thereby increasing the profits of the company.

Growing Cloud Momentum

In the last-reported fiscal second quarter, revenues were RMB2.98 billion (US$447 million), increasing 99% year over year. Additionally, Alibaba Cloud launched 245 new products and features to enable small and large enterprises to achieve higher computing performance and storage capability.

The figure is expected to further increase in the upcoming quarter driven by an increase in the number of paying customers and higher-than-usual spending by them, reflecting increased usage of services.

Overhangs Remain

Concerns remain in the form of rising costs associated with new businesses initiatives, rising logistics and order-fulfillment costs. Also, the company is willing to spend plenty of cash on its entertainment and media units, which management has identified as key growth drivers outside of its core e-commerce business.

Also, increasing competition from companies like Amazon.com Inc. (AMZN) and Jd.com (JD), among others and deceleration of growth in the e-commerce market both domestically and internationally could impact results in the upcoming quarter.

Moreover, the company was suspected for the sale of counterfeit products on its online shopping platform, Taobao.com. Such report may have a negative impact on the company’s image and its international expansion strategy.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or #5) are best avoided, especially when the company is witnessing negative estimate revisions.

Alibaba has a Zacks Rank #2 and an Earnings ESP of -0.30%, which does not indicate a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

You could also consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank.

Applied Materials, Inc. (AMAT - Free Report) , with an Earnings ESP of +0.57% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Advanced Micro Devices, Inc. (AMD - Free Report) with an Earnings ESP of +12.75% and a Zacks Rank #3.

Advanced Energy Industries, Inc. (AEIS - Free Report) with an Earnings ESP of +0.41% and a Zacks Rank #3.

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