Alibaba Group Holding Ltd (BABA) stock has had a tough go of it this year.
After getting off to a blistering start on the heels of its record-setting IPO in the fall of 2014, shares peaked out at $120 per share within months of going public at $68 a pop.
Since then, BABA stock is down nearly 38% from its highs, with a 28% selloff coming in 2015 alone.
Shareholders are hoping that second-quarter fiscal 2016 earnings, due before market open on Tuesday, will bring some good news and spark a turnaround in the Alibaba stock price.
I’m not quite so optimistic myself and think BABA is a risky hold going into earnings season.
Let’s take a look at what Wall Street’s looking for from the Chinese e-commerce giant’s quarter, which ended Sept. 30.
BABA Earnings Estimates
Analysts expect BABA to post non-GAAP diluted earnings per share of 54 cents per share in Q2, up 20% from Q2 2015 EPS of 45 cents, according to Capital IQ. Revenue is expected to clock in around $3.38 billion by some estimates.
A practical tip for investors doing their own research on BABA: The analyst estimates in Yahoo! (YHOO) Finance and other places appears to be in China’s currency, the yuan, not U.S. dollars, despite the phrase “currency in USD” at the bottom of the page. This skews the stated forward P/E multiple, which Yahoo! states is currently under 4.
The same exact issues occur on Yahoo Finance’s Baidu (BIDU) page, and could be repeated with other Chinese companies.
Obviously, the weakening Chinese economy has been detrimental to the BABA stock price in recent times, and it will put downward pressure on Alibaba’s revenues when reported in dollars. Using Yahoo! Finance’s 21.32 billion (in yuan) and assuming a weighted average conversion rate of 6.3 yuan per USD, the consensus is actually around $3.38 billion.
There are other warning signs surrounding BABA stock going into earnings, however. Wedbush recently cut its price target on Alibaba shares to $75 from $80, saying that its recent bid to acquire the remaining 82% of Youku Tudou (YOKU) with $3.5 billion in net cash should raise eyebrows.
Analyst Gil Luria thinks the move may hint at troubles with Alibaba’s core business, since the company will be using a large chunk of its cash to snap up some growth.
Then, of course, there’s the specter of increasing competition that could ding results, as I noted a few weeks back:
“Serious competition is finally rearing its ugly head, mainly in the form of its largest direct rivals, JD.com (JD) and Vipshop (VIPS). Analysts expect 2015 revenue growth at JD and VIPS of 55% and 68%, respectively.
“By comparison, Wall Street expects revenue growth from BABA of just 27% this fiscal year.”
By those measures, BABA would seem to be losing market share to its largest Chinese competitors.
If that’s not enough to get you at least a little worried, corporate governance issues — as well as allegations that Alibaba has been letting sellers hawk counterfeit goods — aren’t going away.
Analyst earnings estimates have also stubbornly fallen from 58 cents per share three months ago to 54 cents per share today.
All told, that’s enough to keep me away from trying to play BABA going into Tuesday’s earnings report.