Alibaba (BABA) 2nd Quarter Earnings: What to Expect

Is now the time to buy shares of Alibaba (BABA)? Since reaching a record high in June, Alibaba's stock has been punished, losing more than 35% of its value. And that’s despite posting a top- and bottom-line beat in its last earnings report, including 61% surge in revenue.

The Chinese e-commerce giant is set to report second quarter fiscal 2019 earnings results before the opening bell Friday. The company has suffered amid the recent pullback not only in U.S. tech stocks, but also due to the broader selloff in other Chinese tech giants such as Tencent and (JD). Macroeconomic concerns regarding tariffs and the company’s investments in growth are among the factors that have weighed on the stock.

These investments include its roll out of various cloud products aimed at meeting the needs of customers who are migrating more towards the realm of Artificial Intelligence, Machine Learning, and the Internet of Things. While the cloud remains a relatively small revenue driver for Alibaba, compared to Amazon’s (AMZN) AWS and Microsoft’s (MSFT) Azure, Alibaba management remains confident about the cloud’s long-term trends of the business.

In the three months that ended September, Wall Street expects Hong Kong-based online retailer to earn $1.06 per share on revenue of $12.47 billion. This compares to the year-ago quarter when earnings came to $1.23 per share on revenue of $7.94 billion. For the full year, ending March 2019, earnings are projected to rise 20% year over year to $5.26 per share, while full-year revenue of $56.66 billion would rise 57% year over year.

In its first quarter results, reported August, Alibaba posted a 61% surge in its core commerce revenues, reaching $9.9 billion. That level of growth in its largest business segment was driven by Taobao and Tmall. Investors will pay close attention to see whether this trend can continue. But I don’t expect there to be much deviation from that performance.

The biggest question mark will be with its other major business lines, including local services, digital media and entertainment, and of course, cloud computing, which — in the last quarter — saw revenue skyrocket 93% year over year. As noted, this still represents a small contributor to the top line, but any acceleration would be a positive for the stock.

There’s also the question of the company’s profit margins, which have contracted in recent quarters due to Alibaba’s investments in growth. Bears call these investments “spending sprees.” Of note, the company spend $9.5 billion to acquire food delivery platform Eleme and owns a 33% stake in Ant Financial that is worth billions. The management has been candid, warning investors that these investments will take some time to bear fruit and, in the process, would continue to squeeze margins.

Friday’s results, however, and the company’s guidance, will reveal how much confidence the management really have in these growth areas and how much investors should put into Alibaba’s sudden appealing valuation. The stock currently trades at just 25 times this year’s earnings, while trading at just 18 times 2019 consensus earnings estimate. Those are reasonable, if not cheap prices relative to the company’s historical valuation.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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