Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE: BABA) reports first-quarter earnings for fiscal 2018 before market open on Thursday,
August 17. The stock has rallied a substantial amount since the start of 2017 on strong results in fiscal 2017 and management’s
updated outlook for fiscal 2018.
For the upcoming quarter, analyst expectations are particularly high for several reasons. First, many analysts revised their
estimates after BABA management updated their guidance for fiscal 2018, saying they expect total sales growth of 45% to 49%.
Second, some analysts hiked their estimates following the release of China’s retail sales data for June.
According to China’s National Bureau of Statistics, or NBS, online retail sales in June grew 41% year-over-year, accelerating
from the 30% year-over-year growth reported in May. At the same time, the NBS reported that e-commerce penetration ticked up to
18.6%, up from 14.7% in the prior-year period.
In the last quarter, BABA reported that its core commerce revenue increased 47% year-over-year to $4.59 billion and that annual
active buyers on its China retail marketplaces reached 454 million. Beyond its Chinese retail marketplaces, BABA has continued to
focus on international growth through AliExpress and Lazada, which the company reported had a combined 83 million annual active
buyers.
In addition to its core commerce segment, the company’s cloud computing segment has been a growing focus among analysts. In the
last quarter, revenue from cloud computing increased 103% year-over-year to $314 million. At the end of fiscal 2017, BABA had
874,000 paying cloud customers and said the top priority for Alibaba Cloud is to expand its market leadership.
Over the past several years, it has announced the expansion of its data centers to new international markets, allowing it to
serve new customers in those areas. While the expansion has the potential to expand Alibaba Cloud’s customer base, some analysts
have warned that growing competition in cloud computing could result in margin compression as companies drop prices to attract new
customers and retain old ones. Cloud computing is a big focus for BABA and it’s an area that analysts will likely be looking for
additional information on its earnings call.
Another area analysts might be looking for more insight on the earnings call is the company’s digital media and entertainment
division, which is primarily comprised of Youkou Tudou and UCWeb. Both of the companies were acquired by Alibaba over the past
several years. In the last quarter, revenue in the segment increased 234% year-over-year to $571 million—that growth was largely
attributed to the acquisition of Youkou Tudou.
FIGURE 1: A STEADY RISE. For the most part since the start of 2017, BABA has steadily increased and is up 78.05%
year to date. The stock gapped up at the beginning of June after BABA management updated its guidance at its annual investor
day. Chart source: thinkorswim® by
TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only.
Past performance does not guarantee future results.
Alibaba Group Earnings and Trading Activity
For the first quarter of fiscal 2018, BABA is expected to report earnings of $0.92 per share, up from $0.74 in the prior-year
quarter, on revenue of $7.02 billion, according to Wall Street consensus analyst estimates. Revenue in the quarter is expected to
grow approximately 45% year-over-year.
The stock jumped in early June after management updated their guidance for revenue growth for fiscal 2018 at the company’s
annual investor day. Since then, the stock has continued to have a steady run-up and is up 78.05% year to date as of yesterday’s
close. Over the past 60 trading days, the stock has had a 0.85 correlation with the S&P 500 (SPX), so it’s been moving more in
line with the broader indexes than it has in the past.
Options traders have priced in about a 4.7% potential share price move in either direction around its upcoming earnings release,
according to the Market Maker Move indicator on the thinkorswim® platform.
In short-term options trading at the August 18 expiration, calls have been active at the 160 and 165 strike prices, while puts
have been active at the 150 and 155 strikes. As of this morning, the implied volatility sits at the 73rd percentile.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over
a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined
price over a set period of time.
Looking Ahead
Earnings season is slowing down, but there’s still a few companies left to report. On Friday, we’ll get a look at the state of
agriculture with Deere & Company (NYSE: DE). And if you
have time, make sure to check out today’s market
update to see what else is happening.
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Image Credit: Rico Shen [CC BY-SA 4.0-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/4.0-3.0-2.5-2.0-1.0)],
via Wikimedia Commons
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