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Alibaba Group Holding ((BABA - Free Report) ) runs the largest e-commerce website in China and is scheduled to report earnings Thursday, August 10th, before the market open.
BABA has endured a tough time in the past few years due to a struggling economy, the “Zero-COVID” policy in China, and government scrutiny. However, the Chinese economy is showing signs of life, and the Zero-COVID policy is a thing of the past. Meanwhile, investors believe that the $1 billion fine slapped on BABA affiliate Ant Group is the end of the government crackdown. Read on for a full earnings preview.
Strong Zacks Rank of “Buy”
Zacks Investment Research was built on the foundation of the Zacks Rank, which was created by Len Zacks, the Founder and CEO of Zacks. Through years of research and statistical models, Zacks uncovered a secret to finding winning stocks and beating the market. “Earnings estimate revisions are the most powerful force impacting stock prices.” From this seminal work emerged the now famous Zacks Rank stock-picking system. Based on recent revisions, Alibaba earns the second-best Zacks Rank #2 (Buy). In the past 60 days, five analysts have upped their BABA EPS estimates, while only three have decreased them.
Image Source: Zacks Investment Research
EPS Surprise History
Two rare earnings misses led to the devasting price correction in the stock from late 2020 to late 2022. However, based on the past several quarters, it’s no coincidence that BABA shares have begun to stabilize. BABA has delivered positive surprises for seven straight quarters, and over the past two quarters, the e-commerce giant has beat earnings by a healthy clip of 20 and 21.83%.
Image Source: Zacks Investment Research
Spotty Earnings Reaction History
Another factor for investors to consider is the price action response on the day of earnings. From this perspective, BABA is a mixed bag. The price change over the past four quarters was 5.41%, -0.65%, +7.68%, and +11% the day of earnings. Meanwhile, for BABA’s current quarter, the options market is implying a move of ~6.5%. Though the company’s earnings reactions have been mixed to slightly positive, a lot has changed recently, including:
Chinese Equities Are in a Bull Market
In the stock market, 75% of stocks follow the general market’s direction, and thus, “A rising tide lifts all ships.” Large-cap Chinese stocks bottomed in late 2022, and the iShares China Large-Cap ETF ((FXI - Free Report) ) is up more than 20% since.
Image Source: TradingView
Government Stimulus
The Chinese economy and stock market have slumped for months. In late July, China Released its Purchasing Managers’ Index (PMI) numbers, which calculates activity in the manufacturing sector. The 49.3 number that was released for July marked the third straight month of contraction and the lowest rate since late last year. The silver lining for investors is that the weak economic data is finally spurring the Chinese government into action in the form of stimulus.
Return-on-Equity Turning Higher
ROE is a measure of financial efficiency that accounts for a company’s income divided by average share holder equity. BABA’s ROE is turning higher for the first time since 2018.
Image Source: Zacks Investment Research
Recently, BABA management has put a more considerable emphasis on catering to foreign, high-quality merchants, improving the firm’s monetization rate. Furthermore, advances in the company’s recently launched mobile apps are helping BABA gain more momentum.
Domestic Demand is on the Rise
The advent of low-cost, widely available telecommunication infrastructure in China is increasing the popularity of online shopping. That’s good news for BABA; the company owns the Chinese market with an 80% market share.
International Growth
BABA management is not taking the rebound in domestic growth for granted. The company is looking to expand to foreign markets such as the US. In pursuance of this strategy, Alibaba operates an American website called 11Main.com. While the website is still low-profile and relatively unknown, the long-term potential of a market as big as the United States is a catalyst not anticipated by Wall Street.
Attractive Valuation
Alibaba is now a potential Growth at a Reasonable Price (GARP) play. While growth is expected to ramp up in the coming quarters, BABA’s price-to-sales (P/S) ratio is at an all-time low of 2 (it was > 25 at the IPO in 2014.
Image Source: Zacks Investment Research
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Alibaba EPS Preview
Alibaba Group Holding ((BABA - Free Report) ) runs the largest e-commerce website in China and is scheduled to report earnings Thursday, August 10th, before the market open.
BABA has endured a tough time in the past few years due to a struggling economy, the “Zero-COVID” policy in China, and government scrutiny. However, the Chinese economy is showing signs of life, and the Zero-COVID policy is a thing of the past. Meanwhile, investors believe that the $1 billion fine slapped on BABA affiliate Ant Group is the end of the government crackdown. Read on for a full earnings preview.
Strong Zacks Rank of “Buy”
Zacks Investment Research was built on the foundation of the Zacks Rank, which was created by Len Zacks, the Founder and CEO of Zacks. Through years of research and statistical models, Zacks uncovered a secret to finding winning stocks and beating the market. “Earnings estimate revisions are the most powerful force impacting stock prices.” From this seminal work emerged the now famous Zacks Rank stock-picking system. Based on recent revisions, Alibaba earns the second-best Zacks Rank #2 (Buy). In the past 60 days, five analysts have upped their BABA EPS estimates, while only three have decreased them.
Image Source: Zacks Investment Research
EPS Surprise History
Two rare earnings misses led to the devasting price correction in the stock from late 2020 to late 2022. However, based on the past several quarters, it’s no coincidence that BABA shares have begun to stabilize. BABA has delivered positive surprises for seven straight quarters, and over the past two quarters, the e-commerce giant has beat earnings by a healthy clip of 20 and 21.83%.
Image Source: Zacks Investment Research
Spotty Earnings Reaction History
Another factor for investors to consider is the price action response on the day of earnings. From this perspective, BABA is a mixed bag. The price change over the past four quarters was 5.41%, -0.65%, +7.68%, and +11% the day of earnings. Meanwhile, for BABA’s current quarter, the options market is implying a move of ~6.5%. Though the company’s earnings reactions have been mixed to slightly positive, a lot has changed recently, including:
Chinese Equities Are in a Bull Market
In the stock market, 75% of stocks follow the general market’s direction, and thus, “A rising tide lifts all ships.” Large-cap Chinese stocks bottomed in late 2022, and the iShares China Large-Cap ETF ((FXI - Free Report) ) is up more than 20% since.
Image Source: TradingView
Government Stimulus
The Chinese economy and stock market have slumped for months. In late July, China Released its Purchasing Managers’ Index (PMI) numbers, which calculates activity in the manufacturing sector. The 49.3 number that was released for July marked the third straight month of contraction and the lowest rate since late last year. The silver lining for investors is that the weak economic data is finally spurring the Chinese government into action in the form of stimulus.
Return-on-Equity Turning Higher
ROE is a measure of financial efficiency that accounts for a company’s income divided by average share holder equity. BABA’s ROE is turning higher for the first time since 2018.
Image Source: Zacks Investment Research
Recently, BABA management has put a more considerable emphasis on catering to foreign, high-quality merchants, improving the firm’s monetization rate. Furthermore, advances in the company’s recently launched mobile apps are helping BABA gain more momentum.
Domestic Demand is on the Rise
The advent of low-cost, widely available telecommunication infrastructure in China is increasing the popularity of online shopping. That’s good news for BABA; the company owns the Chinese market with an 80% market share.
International Growth
BABA management is not taking the rebound in domestic growth for granted. The company is looking to expand to foreign markets such as the US. In pursuance of this strategy, Alibaba operates an American website called 11Main.com. While the website is still low-profile and relatively unknown, the long-term potential of a market as big as the United States is a catalyst not anticipated by Wall Street.
Attractive Valuation
Alibaba is now a potential Growth at a Reasonable Price (GARP) play. While growth is expected to ramp up in the coming quarters, BABA’s price-to-sales (P/S) ratio is at an all-time low of 2 (it was > 25 at the IPO in 2014.
Image Source: Zacks Investment Research