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Should Investors Buy Alibaba Stock Ahead of Its Earnings?

BABA stock's current short-term risks outweigh the long-term value

Alibaba Group (NYSE:BABA) will report earnings on Aug. 15 before market open. Over the past year, BABA has become one of the proxy companies in the U.S.-China trade wars. As the daily trade rhetoric intensifies, Alibaba stock becomes more volatile.

Alibaba stock is a solid name, but geopolitics present big worries

Furthermore, in Hong Kong, where BABA stock is about to complete a secondary listing, has had weeks of political protests. The violence has forced the Hong Kong airport authority to cancel all daily flights over protests. Naturally, this uncertainty has led to further choppiness in the Chinese and Hong Kong stock markets.

As a result, the Alibaba stock price has been struggling lately. Therefore, in the upcoming quarterly statement investors will pay attention to not only the current results but also to what the expectations of Alibaba’s management are for the rest of the year.

So, what should BABA stock investors expect in the coming weeks amid escalating tensions and the tit-for-tat retaliation between the two countries?

A Growing Ecosystem Boosts Alibaba Stock

As Alibaba Group gets ready to release its quarterly results this week, investors should keep in mind that the company’s share of the Chinese e-commerce space is over 55%.

The group operates through three main ecommerce sites: Taobao, a Chinese online shopping website, Tmall, a Chinese-language website for business-to-consumer online retail, and Alibaba.com, an international trade site. Investors regard these sites as the Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) of China.

As of the end of March, Alibaba’s mobile monthly active users (MAUs) on its China e-commerce platforms reached 721 million. This metric should obviously interest owners of Alibaba stock.

Further, Alibaba is also rapidly expanding into many other lucrative industries aside from consumer products and retail. These segments include cloud computing infrastructure (i.e., Alibaba Cloud), digital payments (i.e., Ant Financial Services Group), online entertainment (i.e., Youku Tudou and Alibaba Pictures), and food delivery (i.e., Alibaba Local Services Company which is a merger between Ele.me and Koubei).

Alibaba owns over 31% of Weibo (NASDAQ:WB), the Chinese microblogging company. Chinese internet celebrity (better known as “wanghon) accounts at Weibo, and the website’s rich multimedia functionalities help make WB a much-loved and somewhat indispensable social media company within China. Furthermore, WB’s recent investments in live video streaming and fintech have already started contributing to the bottom line.

Many analysts have expressed growth concerns regarding China in the coming quarters. Yet the country’s economic fundamentals have vastly improved over the past decade. The internet population is still booming. And money continues to pour into Chinese companies operating in this space, factors that help support BABA stock longer term.

What Investors May Expect from Alibaba’s Earnings

On May 15, Alibaba reported financial results for the quarter and fiscal year ended March 31, 2019. Its revenue came at $13.9 billion, an increase of 51% year-over-year. On the bottom line, BABA grew adjusted net income by 12%. In fiscal 2020, management expects revenue to top $72 billion, a 33% YOY growth rate.

Analysts project Alibaba’s Q1 earnings per share to hit $1.13 a share.  The firm’s full-year fiscal 2020 EPS figure is then expected to be $5.04. Therefore, investors will likely look to see if there are any deviations from these consensus numbers.

On Aug. 15, Wall Street will pay attention to BABA stock regarding four segments for revenue numbers:

  • Core commerce (BABA’s largest segment which grew 51% YOY in FY 2019);
  • Cloud computing (which soared 76% YOY in FY 2019);
  • Digital media and entertainment
  • Innovation initiatives

An important metric to pay attention to is Alibaba’s operating margin, which stands at 18%. Over the years, BABA’s high operating margin has contributed to the profitability of Alibaba stock.

Investors will also take a closer look at BABA’s declining gross profit margin of 45%. Although it is still a respectable number, it is the lowest gross profit margin in nearly four years.

In general, Alibaba’s management does not provide any earnings guidance for future quarters. But there is general consensus that BABA’s top line can increase at an average annual rate of 20%. That’s through both organic growth and acquisitions. That would be an impressive growth rate for a company with a market capitalization of $410 billion.

Short-Term Price Decline in BABA Stock Is Likely

Early investors who have been bullish on BABA stock have been rewarded well, partly thanks to the tremendous revenue growth the group has seen. In Sep. 2014, Alibaba stock started trading on the New York Stock Exchange at an opening price of $92.70.

However, the BABA stock price has been quite volatile since early 2018. Currently, it is hovering around $159 and year-to-date, Alibaba shares are up about 15%.

Many shareholders are understandably wondering if Alibaba stock may go below $150. Perhaps, it may even drop toward the $130 level to test the lows of Dec. 2018.

In August, broader markets have been negatively impacted by the ramping rhetoric of the U.S.-China trade wars. If the two sides cannot reach a deal in the coming days, then BABA stock, like many other Chinese stocks, is likely to suffer further.

The options markets are pricing in a post-earnings move of approximately 10% to 13% in either direction. If the earnings report is favorable, my next price target for Alibaba stock in the coming weeks would be between $160 and $175.

On the other hand, if earnings guidance disappoints, BABA stock could quickly drop below $150. When one considers the fact that its trailing price-earnings ratio stands at 45 times, many investors would not hesitate to hit the sell button if they fear Alibaba is growing as fast as the share price warrants.

In the wake of BABA’s earnings, I do not expect Alibaba stock to regain its recent high of $179.88. This level was last seen on July 29. Instead, BABA stock is likely to trade in a range, possibly between $145 and $155, for several weeks.

The daily volatility of Alibaba stock is high, giving it a broad trading range. Therefore, short-term traders should proceed with caution.

The Bottom Line on Alibaba Group

Alibaba stock offers American investors the chance to invest in the growing Chinese consumer and e-commerce markets. As the company’s second decade ends, it is increasingly focusing on becoming a social hub. Alibaba’s growth in e-commerce, cloud computing, and its other investments throughout China and globally make it a sound long-term investment.

Therefore, patient investors should view any decline in BABA stock as a good buying opportunity.

However, traders with a short-term horizon should remember that there might be further declines in Alibaba stock around the release of its earnings.

If you already own BABA stock, you might want to hold onto your shares. That said, if you are worried about profit-taking in the short-term, then within the parameters of your portfolio allocation and risk-return profile, you may consider placing a stop-loss at about 3% to 5% below the current price point.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/should-investors-buy-alibaba-stock-ahead-of-earnings/.

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