Will Alibaba’s Accounting Issues Be Put to Rest Anytime Soon?

While BABA's growth appears impressive, doubts about the company's numbers remain

3 Pros, 3 Cons for Buying Alibaba Stock

Source: Shutterstock

Alibaba (NYSE:BABA) reports earnings before the bell on Thursday. The Chinese e-commerce giant has struggled to grow its stock over the last year as company spending and fears of a U.S.-China trade war have put a dent in BABA stock. However, stagnation in the stock and investments in company growth have increased interest in Alibaba.

Wall Street predicts consensus earnings-per-share of 74 cents in non-GAAP earnings. If this holds, it would represent a drop from the EPS of 94 cents reported in the same quarter last year. Analysts also expect quarterly revenues to come in at $11.8 billion. This would represent a 62% increase from the year-ago level of $7.29 billion.

Admittedly, falling profits amid rapidly growing revenue appears suspicious. Alibaba has invested heavily in physical infrastructure. For most of its history, the company has more closely resembled eBay (NASDAQ:EBAY) in that it acted as the middleman. Today, the company continues to invest in offline shopping. However, allegations of accounting irregularities have also dogged the company. This makes telling the difference between growth and possible fluff difficult.

Trade Issues, Businesses Drive BABA Stock

Trade relations have also weighed on the company. BABA, like peers such as JD.com (NASDAQ:JD) and Tencent (OTCMKTS:TCEHY), has struggled as fears of a U.S.-China trade war have sent all Chinese e-commerce stocks reeling in recent months. Alibaba has beaten estimates in three out of the last four quarters. However, Tencent saw its profits fall for the first time in 10 years. JD also missed on earnings estimates. The upcoming report will indicate whether the same trends have affected Alibaba stock.

Perhaps its competition from the likes of JD and Tencent. Or maybe the message from myself and other InvestorPlace writers that JD is the real “Amazon (NASDAQ:AMZN) of China” has begun to resonate across the Pacific. Either way, Alibaba has grown to resemble Amazon more.

For this reason, analysts will also look at the growth of Alibaba Cloud. The company recently moved ahead of IBM (NYSE:IBM) in the market share of the world’s cloud market. However, it has not caught up to Amazon or Microsoft (NASDAQ:MSFT). Still, its dominance of the growing Chinese cloud market could create the conditions necessary to become the world’s largest cloud company eventually.

Additionally, its non-core initiatives such as payment processing, artificial intelligence, music delivery and others all contribute to bolstering this conglomerate.

Why BABA Should Grow

I have criticized BABA stock in previous articles regarding its conglomerate status. I still believe that if one wants to invest in multiple businesses, a mutual fund or an ETF paves a safer path toward such diversity. The accounting issues discussed off and on over the years reinforce the need for diversity.

Still, assuming investors can trust the accounting, BABA has begun to look like a more compelling buy. Even under non-GAAP accounting, if predicted profits of $4.73 for the fiscal year hold, the forward price-to-earnings ratio would come to around 37.5. Analysts also predict profit growth for next year of about 38%. Due to accounting issues, I am not ready to recommend the stock. However, if the stock continues to stagnate or fall, BABA could become worth a gamble at a low P/E ratio.

Bottom Line on Alibaba Stock

Alibaba’s moves to continue long-term profit growth, as well as recent stock price-related stagnation, appear to change the value proposition on BABA stock.

The earnings report on Thursday should give traders more insight on the state of the company. China’s trade relations with the U.S. have also weighed on the stock. While signs continue to point to massive increases in size, accounting issues cast doubts on the extent of this growth. For this reason, I still think BABA stock carries more risk than most investors appreciate. Given that risk, only an ultra-low valuation would compel me to buy BABA stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned securities. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/will-alibabas-accounting-issues-be-put-to-rest-anytime-soon/.

©2019 InvestorPlace Media, LLC