Alibaba earnings (Shutterstock photo)
Chinese e-commerce and tech giant Alibaba (BABA) will report second quarter fiscal 2018 earnings results before the opening bell Thursday. With year-to-date returns approaching 110%, you would be hard-pressed to find a hotter stock on market today.
Yet, despite being one of 2017’s best performers, a case can be made that BABA shares, which trade at just 26 times 2018 EPS estimates, are cheap. That valuation is almost 20 points below its historical average. At the same time, Wall Street analysts are constantly revising BABA’s profits estimates higher in order to keep up with the company’s growth. Just in the past thirty days, estimates for the just-ended quarter and full year have been revised higher by 8% and 7%, respectively.
In the three months that ended September, Wall Street expects Hong Kong-based online retailer to report $1.04 per share on revenue of $7.86 billion, translating to year-over-year growth of 31.6% and 52%, respectively. For the full year, ending in March 2018, earnings are projected to rise 39% year over year to $4.91 per share, while full-year revenue of $35.63 billion would rise 49.5% year over year.
As gaudy as these projections might appear, Alibaba has established a track record of crushing even the most bullish expectations. Last quarter the company reported a profit of $2.17 billion, or 82 cents per share. On an adjusted basis, when taking out one-time gains and costs, earnings were $1.17 per share per share, which beats Thomson Reuters consensus estimates of 93 cents per share. The company also posted revenue of $7.52 billion, which also topped Street forecasts $7.15 billion.
The results, which includes first quarter revenue surging 56%, combined with a whopping 24-cent beat on the bottom line, sent BABA stock soaring almost 10% to then an all-time high go $167.50. Since then the stock, which has gained almost 20% in three months, has amassed several more all-time highs, currently at $184.70.
But the top- and bottom-line numbers are just part of the story. On Thursday, Wall Street will want to see whether the world's largest retailer (by gross merchandise volume) can continue diversifying its business to strengthening its position beyond core commerce. Areas such as its digital payments platform, AliPay and new growth areas such as the cloud, where it has a goal of challenging both Amazon (AMZN) and Microsoft (MSFT) will be in focus.
In the first quarter, Alibaba’s cloud revenue surged 96% year over year, driven by 15% sequential rise in the number of cloud-paying customers, which now stands at over one million. The company has not only seen increases in the number of paying customers, its customers are also spending higher than usual, which drives up usage of services.
Elsewhere, analysts will also want to see sustained increases in fast growing, albeit smaller segments such as digital media and entertainment revenue and innovation initiatives, which in Q1 posted revenue growth of 30% and 21%, respectively. All told, with its market cap approaching half a billion dollars, Alibaba has high expectations to live up to this quarter. But with a quality management team that is known for consistently knocking it out of the park, betting against of the strongest tech conglomerates on the market today, which has wind in its sails, can get you hurt.