China’s largest tech company, Alibaba Group Holding Ltd. (NYSE:BABA), is slated to report fiscal second-quarter earnings before market open on Friday, Nov. 2. 

This’ll be BABA’s first report since chairman and CEO Jack Ma announced in September that he would be stepping down from his roles in 2019,  although he indicated that he still plans to stay involved in the company past then. 

As the company’s leadership shuffles, analysts have increasingly expressed concerns about the potential for economic slowdown in China thanks to ongoing trade battles and signs of softening consumer spending, particularly in the luxury segment. When it reported this week, Baidu (BIDU), another one of the tech giants  in China, cautioned that its future revenue growth could be negatively impacted by diminishing confidence in the economy there.  

Whether or not that has been impacting BABA seems to be a question that’s top of mind for many analysts and investors. When BABA reports tomorrow, adjusted EPS is expected to come in at $1.06, down from $1.23 in the prior-year period, on revenue of $12.4 billion according to third-party consensus analyst estimates. Revenue is projected to increase 56.2 percent from last year’s $7.94 billion. 

The expected decline in earnings has apparently resulted from BABA’s aggressive investments across industries, something management has previously said will continue in the foreseeable future. Some of its investments/acquisitions in 2018 have been in logistics companies ZTO Express (Cayman) Inc. (ADR) (NYSE:ZTO) and Huitongda, bike-sharing startup Ofo and food delivery company Ele.me, to name a few.

Core Commerce 

Cloud Computing

Alibaba Options Activity

Another likely cause is a move the company made earlier this year with Ant Financial, the company’s payments affiliate that operates Alipay. BABA traded a 37.5 percent profit-share agreement it had with Ant for a 33 percent equity stake in the company, which put Ant’s share-based compensation expenses and bottom-line results on BABA’s books. 

In fiscal Q1, BABA reported that Core Commerce revenue increased 61 percent year over year to $10.46 billion, accounting for a significant portion of the company’s $12.23 billion in total revenue. 

When BABA last reported, mobile monthly active users hit 634 million in June 2018, up by 17 million users from the quarter before. Annual active consumers on its China retail marketplaces climbed to 576 million, an increase of 24 million over the 12-month period ending in March. 

The company’s annual shopping event, Singles’ Day, is also coming up on Nov. 11, so analysts might be looking for more information about how management thinks everything will go given the current macro backdrop.

Outside of Core Commerce, BABA’s Cloud Computing segment is another primary focus among analysts. When it last reported, Cloud Computing revenue increased 93 percent year over year to $710 million—management attributed the growth to both an increase in paying customers and value-added services.

This division has been operating at a loss and BABA has invested heavily in expanding the number of data centers it operates to be able to reach new customers. Most recently, BABA announced it would open two new data centers in the U.K.

Around Friday’s earnings release, options traders have priced in a 5.1 percent stock move in either direction, according to the Market Maker Move indicator on the thinkorswim^® platform. Implied volatility was at the 70th percentile as of this morning. 

In short-term trading at the Nov. 2 weekly expiration, calls have been active at the 145 strike price, with higher volume at the 148 and 150 strikes as well. On the put side, most of the recent trading has been concentrated at the 140 strike. 

At the Nov. 16 monthly expiration, the 140, 145 and 150 strike prices have all had higher volumes in recent sessions. Open interest at those levels remains high as well, ranging from 27,000 to about 36,000 open contracts as of Thursday. 

For puts at the Nov. 16 expiration, volumes have been lighter in recent sessions, as the stock is trading closer to its 2018 lows. Open interest is also high at the 140, 145 and 150 strikes, ranging from about 35,000 to 39,500 contracts open as of Thursday.  

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.

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