How long can Alibaba (BABA) stock remain cheap? Currently trading at around $72 per share, BABA has fallen some 34% over the past year, compared to 20% rise in the S&P 500 index. The stock is down 6% year to date, including 30% over the past six months; both measures trail the S&P 500 index.
The Chinese e-commerce giant is set to report third quarter fiscal 2024 earnings results before the opening bell Wednesday. With the stock falling 71% in three years, compared to a 32% rise in the S&P 500 index, BABA still has a lot of ground to make up. On the bright side, the stock is up 25% since reaching its low of $58. This gain has been fueled, in part, by what is believed to be a softer regulatory and macroeconomic environment in China that can improve the company's growth trajectory.
With a more subdued regulatory scrutiny of big tech platforms in China, the headwinds BABA has faced over the past two years are fading away. Another potential catalyst is its management recently touting new AI tools, putting BABA at the forefront the main providers of key AI technologies in China. The launch of AI tools is another way for BABA to leverage its market leadership position within the cloud segment. This highlights the company’s diversified revenue sources, along with its cloud potential.
With more than 900 million annual active customers on its various sites, Alibaba has a robust platform for merchants, where there more than 8 million sellers. This is notable given that Chinese e-commerce market is poised to grow at an 11% CAGR in the next five years. All told, Alibaba might not be completely back in the market’s good graces, but the Chinese tech giant has some massive tailwinds for future growth. On Wednesday the stock can climb if Alibaba can deliver a top- and bottom-line beat and provide a confident outlook for the next quarter and full year.
In the three months that ended January, Wall Street expects Hong Kong-based online retailer to earn $2.67 per share on revenue of $36.73 billion. This compares to the year-ago quarter when earnings came to $2.79 per share on revenue of $35.9 billion. For the full year, ending in May, earnings are projected to rise 19% year over year to $9.09 per share, while full-year revenue of $133.12 billion would rise 9.5% year over year.
The 19% projected full-year profit growth reflects the sort of optimism a recovering Chinese economy creates for Alibaba’s prospects. The company’s diversified revenue sources in China, along with BABA's cloud potential, presents tons of value at current levels. This is in part because Alibaba currently extracts roughly 65% of its total revenue from its China Commerce segment. In terms of the cloud, while that remains a small portion of Alibaba’s revenue, it’s poised to be a long-term growth and profit center for BABA.
Much of Alibaba’s projected growth has begun to materialize, as evidenced by fundamental improvements in the company's fiscal 2Q results which produced revenue of $30.8 billion. While that did fall short of Street estimates, it amounted to a 9% year over year increase. Adjusted Q2 earnings per were $2.14 per share, surpassing consensus estimates of $2.09. The headline numbers were strong; however, the company surprised investors by announcing it would not spin off its cloud business as expected.
Its management cited, among other things, recent U.S. export control expansions. Notably, in terms of a major factor affecting the financial outlook of its Cloud Intelligence Group, Alibaba referenced the U.S. restricting the export of advanced computing chips and semiconductor manufacturing equipment to China. On Wednesday investor will want more details on the cloud business.
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