Alibaba Earnings Preview: E-Commerce And Cloud Computing In Focus

Alibaba Group Holding Ltd. BABA reports earnings for its second quarter of fiscal 2018 before the market opens on Thursday, Nov. 2. The stock has had quite the run in 2017, moving from a low of $88.08 in January to a recent all-time high of $185.12 ahead of tomorrow’s report.

Earnings beats in previous quarters and updated guidance at its annual investor day in June have been some of the events that have helped to push shares higher so far this year. At its investor day in June, BABA management projected revenue growth ranging from 45% to 49% for fiscal 2018, while Wall Street consensus had been forecasting around 37% growth at the time.   

Strong growth expectations in the company’s core commerce platforms and cloud computing, partially driven by increasing internet and mobile penetration in China, were two of primary factors for the updated guidance. In the first quarter of fiscal 2018, BABA reported core commerce revenue increased 58% year-over-year to $6.35 billion, which the company said benefitted from growth in average spending per merchant and the number of paying merchants.

Cloud computing revenue increased 96% year-over-year to $359 million during the same quarter. Management cited user growth in the cloud computing segment, which surpassed one million paying customers, as well as an improved revenue mix of higher-value added services for the 96% year-over-year increase in that division’s revenue. BABA also reiterated that market expansion remains its top priority in cloud computing. 

FIGURE 1: ALIBABA COMPANY PROFILE. Like Amazon (AMZN), Alibaba also provides cloud-computing services in addition to its e-commerce operations. The division is a smaller segment of the company that has been growing the fastest in recent quarters.  TD Ameritrade clients can plug in their own forecasts and analyze a company’s revenue drivers on the Fundamentals tab on the thinkorswim® platform. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

BABA has indicated one of its strategic priorities is to expand both core commerce and cloud computing outside of China. To increase international awareness of the company’s platforms, BABA has started hosting conferences—essentially big marketing road shows—to educate U.S. and Canadian businesses on how to sell to Chinese consumers using its platforms as a gateway.

Revenue from its international commerce retail segment increased 136% year-over-year to $389 million in the fiscal first quarter, according to the company. On the cloud computing front, BABA announced plans earlier in the year to build data centers in Malaysia, India and Indonesia to expand to new regions beyond the 14 data centers it already operates.

Beyond the core commerce and cloud computing metrics, analysts also typically look at mobile monthly active users and annual active consumers. In the fiscal first quarter, BABA reported mobile monthly active users increased 24% year-over-year to 529 million, and annual active consumers for the 12-month period ending June 30 increased 7% year-over-year to 466 million. The company’s upcoming global shopping festival known as Singles’ Day on November 11 is another common focus for analysts. Last year, the event generated $17.8 billion in gross merchandise volume. 

FIGURE 2: ALIBABA YTD PERFORMANCE. So far this year, Alibaba (BABA), which is charted above, has increased a significant amount and is up 108.68% as of October 31. The year-to-date performance for the S&P 500 (SPX) is graphed as the pink line and the tech-heavy Nasdaq Comp (COMP) is the teal line. 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 Earnings and Options Trading Activity

For the second quarter of fiscal 2018, BABA is expected to report adjusted earnings of $1.04 per share, up from $0.79 in the prior-year quarter, on revenue of $7.78 billion, up 51.3% year-over-year, according to third-party consensus analyst estimates. Looking back over the past eight quarters, BABA has beat revenue estimates in all of them and earnings estimates in six of them. 

The stock has continued to rise in 2017, although since early August it has been bouncing up and down in a tighter range. It briefly dipped below its 50-day moving average last week, something the stock hadn’t done all year, but it has since bounced back and is trading close to an all-time high of $185.12.

Around BABA’s upcoming earnings release, options traders have priced in about a 5.1% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the November 3 expiration, calls have been active at the 180 and 190 strike prices, while puts have been active at the 170, 175 and 180 strikes. As of this morning, the implied volatility sits at the 92^nd 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

Later today, the Federal Open Market Committee will release a statement as it wraps up its second to last meeting of the year, potentially providing some more information about the Fed’s views on the overall economy as President Trump mulls over candidates to replace Fed Chair Janet Yellen. On the earnings front, tech mega-cap Apple Inc. AAPL reports earnings after market close on Thursday, Nov. 2. And over the next two weeks, quite a few of the brick-and-mortar retailers including Macy’s Inc M, Wal-Mart Stores Inc WMT, Target Corporation TGT and Home Depot Inc HD report results. If you have time, make sure to check out today’s market update to see what else is happening.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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