Massive Chinese e-tailer Alibaba Group Holding LTD (BABA) is set to report fiscal third-quarter earnings before the bell on Thursday. And while Alibaba has a decent record of beating earnings in the past, wagering on Chinese retail right now doesn’t seem like it’s worth the stretch.
The Chinese economy has slowed to its lowest pace of growth in 25 years, and I don’t know if you’ve noticed, but investors are starting to get spooked. With BABA stock basically a proxy bet on the Chinese consumer, it’s best to avoid the stock right now, even if you believe it will beat on earnings.
Still, let’s unpack what analysts expect from BABA stock in Q3.
Unimpressive Growth … For BABA
The Alibaba stock price has begun 2016 on a terrible note, plunging 14% in the first two weeks of the year. Sure, misery loves company, and it’s some consolation that Chinese rival JD.com Inc(ADR) (JD) is down 12.6% year-to-date, but no sane investor loves misery.
Wall Street expects Alibaba earnings per share of 90 cents in the October-to-December period, 11% more than the 81 cents BABA stock earned a year ago. Revenue, for its part, is expected to soar more than 26%, clocking in at $33.18 billion.
Not bad, right? Generally speaking, 26% revenue growth is quite a feat. That level of growth is nearly impossible to sustain in the long term, and pretty darn impressive for a company the size of Alibaba, which is expected to do nearly $100 billion in sales this fiscal year.
BABA stock owners, however, are used to more explosive revenue growth than that, and the 26.7% growth rate, if it materializes, will be the slowest growth Alibaba has yet experienced in the three-and-a-half years those numbers have been public.
Notably, analysts are also expecting the slowest growth on record for JD.com. Considering BABA and JD are the two largest e-commerce players in China, one can put two and two together and confirm that, yes, the Chinese economy is slowing.
There are other concerns, too: Since Alibaba shares must report revenue and earnings in dollars, the weakening yuan will have a negative impact on results. Continued allegations of facilitating trades of counterfeit goods, as well as skepticism surrounding the veracity of BABA’s numbers themselves, are all very real concerns.
Bottom Line for Alibaba Stock
Longer-term, BABA stock could suffer as customers flock to JD.com, which is starting to gain a better reputation. A Reuters write-up this morning quoted an employee at a tech start-up in Beijing as saying, “They (JD.com) have faster shipping speeds, and the quality is more trustworthy.”
JD.com expects revenue growth between 47% and 51% in the December quarter, a far cry from Alibaba’s expected 26.7% improvement.
Point being: If you’re hell-bent on betting on the Chinese consumer for some reason, JD stock might be a better bet.
I had a similarly bleak outlook three months ago, when BABA was preparing to report Q2 results. Citing an unattractive risk/reward ratio, I recommended staying on the sidelines.
Three months later and 8.5% lower, I stand by my words.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
