Perhaps the biggest sales day of the year can shake Alibaba Group Holding Ltd (NASDAQ:BABA) stock out of its recent funk, but it’s not worth worrying about.
Traders are wondering what it’s going to take to get BABA stock going again. Alibaba blasted Wall Street with better-than-expected earnings last week, and yet that failed to ignite upside in BABA stock.
It’s pretty clear that the headwinds blowing in the e-commerce company’s face are stiffer than first thought. With Singles’ Day just three days away, bulls will get another chance.
They certainly have a chance. The world’s biggest shopping day — it’s already bigger than Black Friday — is expected to set another record this year. That will be quite a feat. In 2015, Singles’ Day saw a 60% spike in sales to $14.3 billion.
It’s too much to expect BABA to deliver another 60% gain on such a large base, but forecasts for Singles’ Day are still stunning. Analysts think Alibaba will rack up receipts of $20 billion. That’s nearly a 50% increase year-over-year. A better-than-expected result could be the catalyst shares need.
However, long-term investors need to ignore such short-term developments. No matter what happens Thursday, the buy case on BABA remains strong in spite of the concern holding it back. The market is worried about the Securities and Exchange Commission’s probe into the company’s accounting practices. Short sellers — notably Jim Chanos — smell blood in the water. It’s holding BABA stock back.
The investigation is a wild card, but that doesn’t change the top-line fundamentals in this name. Here’s a rundown of the positives in the report from Raymond James equity research:
“1) Core commerce revenues increased 40% y/y driven by mobile strength. Mobile monthly average users (MAU) increased by 23M to a total of 450 million (30% y/y) and mobile retail revenue per MAU increased to $23 (73% y/y). Additionally, mobile revenue generated 78% of China commerce retail revenue vs. 76% last quarter. 2) Core commerce margins increased to 62% EBITA margins (vs. 61% last quarter) and flat y/y. 3) Cloud revenues & margins – revenues remained robust with 130% y/y growth (vs. 156% y/y last quarter) and were 4% above our estimate. Paying cloud customers of 651,000 increased 108% y/y. Also, cloud margins improved to a -4% EBITA margin (vs. -13% last quarter).”
Keep You Eyes on the Prize With BABA Stock
BABA’s opportunity for growth in cloud-based services is one of the more bullish parts of the buy case. After all, other revenue streams are coming up against difficult year-over-year comparisons says Citigroup:
“After delivering 40% growth in China retail revenues in the second quarter of 2017, benefiting from 47% growth in online marketing revs (partially offset by 25% growth in commission revenues), management reminded on the call that the online marketing revenues line will experience tougher year-over-year comparisons [for] the next couple of quarters.”
Happily for shareholders, Alibaba is not out of tricks thanks to the cloud and other sources of revenue. From Citi again:
“[G]iven the relatively low percentage of ad loads currently, management sounded confident that there are still a lot of ad inventories that it has yet to monetize, suggesting continued strength in further monetization upside.
Cloud: Ali noted the recent pricing cut on cloud service offering, suggesting the operating efficiency and its target of expanding more aggressively on market share gain rather than short-term profitability target. Mgmt expected the number of paying cloud customers to reach 1 million in the near term (vs. 651,000 in the second quarter of 2017).”
These are the types of things that will drive Alibaba stock well after Singles’ Day is past. BABA could have another blowout day of sales, but it’s the balance of positive operational trends that make it a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
