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Alibaba (BABA) Gears Up for Q2 Earnings: What's in Store?

Zacks Equity Research

Alibaba Group Holding Limited BABA is set to report second-quarter fiscal 2020 results on Nov 1. In the last reported quarter, the Chinese e-commerce giant delivered a positive earnings surprise of 22%.

The surprise history has been decent in Alibaba’s case. The company surpassed estimates in three of the trailing four quarters, with average positive surprise of 19.37%.

Alibaba Group Holding Limited Price and EPS Surprise

 

Alibaba Group Holding Limited Price and EPS Surprise

Alibaba Group Holding Limited price-eps-surprise | Alibaba Group Holding Limited Quote

Strength in Core Commerce Business

Given innovation in data technology, widespread application of big data and increasing validation for Taobao and Tmall portals, its top line is expected to have expanded in the quarter to be reported.

During the fiscal second quarter, the company bought an import e-commerce business, Kaola, from NetEase for about $2 billion. The deal is likely to have enhanced Alibaba’s cross border e-commerce activities and led to top-line growth in the quarter to be reported.

The company expanded product options on Alibaba's Tmall platform. This is likely to have resulted in top-line growth in the to-be-reported quarter.

Strong Mobile Growth

The company’s Mobile Monthly Active Users improved sequentially in the fiscal first quarter, a trend that most likely continued in the fiscal second quarter. This is because of increased adoption of mobile devices by consumers as the primary method of accessing Alibaba’s platforms. 

The company has been building its online marketing inventory on both mobile and PC, as well as recording higher monetization rates. These factors are likely to have continued in the fiscal second quarter and boosted Alibaba’s profits.

Growing Cloud Momentum

In the to-be-reported quarter, revenues from the cloud segment are expected to have increased from a year ago, backed by growth in the number of paying customers and higher-than-usual spending by them, reflecting increased usage of services.

Overhangs Remain

It has been spending heavily in new areas of core online retail business, including supermarkets, stores, new artificial intelligence, digital entertainment and cloud computing businesses. The increased expenses might reflect on Alibaba’s fiscal second-quarter results.

Also, U.S.-China trade tensions and other political worries might have weighed on Alibaba's domestic as well as international growth.

Moreover, increasing competition from companies like Amazon and Jd.com, among others, as well as deceleration of growth in the e-commerce market — both domestically and internationally — might have impacted its earnings in the soon-to-be-reported quarter.

What Our Model Says

Our proven model does not conclusively predict an earnings beat for Alibaba this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. That is not the case here as you will see below.

Earnings ESP: The company has an Earnings ESP of -3.82%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Currently, Alibaba has a Zacks Rank #3.

Stocks That Warrant a Look

Here are a few stocks worth considering, as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.

Advanced Micro Devices, Inc. AMD has an Earnings ESP of +6.54% and a Zacks Rank of #2.

TE Connectivity Ltd. TEL has an Earnings ESP of +1.15% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Apple Inc. AAPL has an Earnings ESP of +0.04% and a Zacks Rank #3.

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