Since the end of the December, shares of Alibaba (BABA) have been on an impressive run, suggesting renewed optimism that a rebound in China might be underway as the country emerges from its zero-COVID sluggishness.
But are these gains sustainable absent clear fundamental improvements in Alibaba’s business? That is one of the main questions investors will ask when the Chinese e-commerce giant reports third quarter fiscal 2023 earnings results before the opening bell Thursday. BABA stock has risen close to 20% year to date, compared to a 6% rise in the S&P 500 index, surging from around $91 to as high as $110. And when factoring 2022 lows on Oct. 24 or around $58, BABA stock has skyrocketed close to 90%.
Investors want to know if there is room for more upside. The gains in BABA have been fueled by the fact that Chinese regulators are eager to reopen the country's economy, reversing their long-standing zero-Covid policy. Alibaba currently extracts roughly 65% of its total revenue from its China Commerce segment. A bet on Alibaba’s ability to capitalize on China’s reopening looks like a good one, particularly given not only the company’s diversified revenue sources within the country, but also its cloud potential.
The Chinese e-commerce giant recently announced plans to invest $1 billion over the next three years to boost its cloud prowess. Although the cloud is currently a small portion of Alibaba’s overall business, currently, the management has begun to prioritize it as a crucial piece towards long-term growth and profitability. Currently still trading at a massive discount, investors are hoping that the bottom has been reached and its quarterly results Thursday will offer positive surprises. If so, the stock can continue its climb assuming Alibaba can deliver a top- and bottom-line beat and provide confident outlook for the next quarter and full year.
In the three months that ended December, Wall Street expects Hong Kong-based online retailer to earn $2.37 per share on revenue of $35.73 billion. This compares to the year-ago quarter when earnings came to $2.59 per share on revenue of $33.71 billion. For the full year, ending April, earnings are projected to rise 4% year-over-year to $7.62 per share, while full-year revenue of $127.2 billion would rise 7.3% year-over-year.
Alibaba's massive scale and e-commerce ecosystem was once an asset that has not seemingly become a liability. To be sure, the company still has multiple streams of revenue which it can grow. However, the increased regulatory scrutiny from the Chinese government has effectively placed a cap on its growth tailwinds. Accordingly, the market had lowered the company’s revenue growth forecasts as it navigates through these headwinds.
However, in recent months, regulatory risk has turned somewhat favorable, if not interesting. The golden share arrangements with Chinese government gives the government 1% ownership in Alibaba's subsidiaries, the Youku Film and Television segment as well as the Guangzhou Lujiao segment. This follows the announcement in January that Alibaba founder, Jack Ma, has relinquished control of the Ant Group subsidiary in which he had 1/3 ownership stake. Although Ma still has a stake in the Ant Group, he no longer has full authority.
In terms of fundamentals, Alibaba recently delivered a strong Q2 report, while announcing they had utilized $18 billion of its initial $25 billion stock buyback program. The company also approved an additional $15 billion of buybacks. For the guidance, the company forecasted e-commerce to grow 33.36% in the next two years. Assuming ongoing relaxed Covid restrictions in China, Alibaba growth rate for the current quarter and full year may be underestimated.
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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