Alibaba Group (NYSE:BABA) will report earnings Thursday before the bell at an exciting and dangerous time for the company. As the trade war intensifies and turmoil in Hong Kong reaches a fever pitch, many are wondering how to trade BABA stock.
I would expect a positive earnings report for Alibaba Group. The results could even prompt a positive reaction in BABA stock. However, given the severity of the political strife and the uncertainty that could bring to the company, investors need to remain aware of four factors which could supersede Alibaba stock earnings.
Expect an Earnings Beat
For its first quarter, Wall Street forecasts earnings per share of $1.46. The company reported an EPS of $1.16 in the same quarter last year. Analysts also predict revenue of $15.82 billion — if that estimate holds, it will represent a 35.7% increase from the year-ago quarter when the company brought in $11.66 billion.
Alibaba stock missed earnings estimates in the same quarter last year. However, its peer JD.Com (NASDAQ:JD) surged higher by more than 13% in Tuesday trading following an earnings beat. Although BABA stock may not react the same way, I believe the company will beat earnings.
Turmoil in Hong Kong Will Weigh on BABA Stock
Unfortunately for investors, the only thing even more massive than the revenue and earnings growth is the uncertainty this company faces. The factors that could supersede earnings news mostly lie beyond the company’s control.
First, the company has begun the process to list Alibaba stock on the Stock Exchange of Hong Kong. However, this comes at a time when Hong Kong is dealing with massive protests following efforts by the Chinese government to assert more direct authority in the special administrative region. This has led to extreme worries in Hong Kong and has even prompted rumors that the protests will lead to an invasion. We have no way of knowing if that will occur. However, such fears and the intensity of the demonstrations casts obvious doubts over it’s initial public offering in Hong Kong.
Secondly, any power grab by the Beijing government could serve as a reminder that Alibaba stock is not actually stock in Alibaba Group. Traders have long discounted BABA compared to Amazon (NASDAQ:AMZN) for this reason. However, the political strife surrounding Hong Kong could easily prompt further discounting of the Cayman Islands-based holding company which represents BABA stock.
Trade and Jack Ma’s Departure Add to Uncertainty
A third factor is that Chinese retailers depend on the U.S. even when they do not. This is because the Chinese economy, and many of Alibaba’s customers, depend heavily on the American consumer. The trade war has hurt Chinese stocks for more than a year-and-a-half. This includes equities such as BABA stock which conduct a negligible amount of business in the U.S.
Fourth, founder Jack Ma will leave his position as chairman of Alibaba in September, completing the full handover of the company to Daniel Zhang. Admittedly, traders will have to wait for years to learn the outcome of this transition. Still, such changes become a concern with conglomerates such as Alibaba. Many remember the decline of General Electric Company (NYSE:GE) after Jack Welch left and do not want to see history repeat itself.
However, until proven otherwise, I would look at this handover as comparable to Steve Jobs handing the reins to Tim Cook at Apple (NASDAQ:AAPL).
The Bottom Line on BABA Stock
For now, the first-quarter earnings report is a less significant concern for Alibaba stock. Alibaba Group has beaten earnings for the last three quarters. Yes, the company missed estimates during the same quarter last year. Still, I expect BABA stock will exceed expectations in much the same way JD stock beat estimates earlier in the week.
However, Alibaba stock faces more daunting challenges, most of which lie outside of the company’s control. The company is listing shares in Hong Kong at a time when this former colony of the United Kingdom has become crippled by protests. This could also prompt investors to look at the holding company that represents Alibaba in a different light.
Additionally, the political turmoil casts doubts on any business conducted in Hong Kong. Further, many of Alibaba’s customers make their living — in some respect — with trade from the U.S. Both the trade war and the aforementioned turmoil in Hong Kong bring uncertainty to growth forecasts.
Investors could see a bump in Alibaba stock following earnings. Still, with all of the turmoil, I would wait for the dust to settle before considering purchasing BABA stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.