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Alibaba (BABA) Gears Up for Q3 Earnings: What's in Store?

Zacks Equity Research

Alibaba Group Holding Limited BABA is set to report third-quarter fiscal 2020 results on Feb 13. In the last reported quarter, the China e-commerce giant delivered a positive earnings surprise of 18.1%.

The surprise history has been impressive in Alibaba’s case. The company surpassed estimates in all the trailing four quarters, with average positive surprise of 17.6%.

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.

The company has been making continuous efforts to add value to consumers and sellers through the consumer segment, product enrichment, as well as platform innovations. This strategy is expected to have expanded the customer base and strengthened top-line growth.

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

Strong Mobile Growth

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

It has been building the online marketing inventory on both mobile and PC, as well as recording higher monetization rates. These factors are likely to have boosted Alibaba’s profits.

Expanding Digital Media and Entertainment

The company has been making efforts to strengthen foothold in the digital media and entertainment industry. The growing unit includes its video-streaming platform Youku and music-streaming service Xiami.

During the quarter, the company announced the partnership with Premier League soccer club, Manchester United Ltd. (MANU), which expanded its content offerings on Youku.The deal is expected to have positively impacted its top-line growth in the quarter.

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 fourth-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.com Inc. 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 predicts 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 the case here as you will see below.

Earnings ESP: The company has an Earnings ESP of +2.17%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Currently, Alibabahas a Zacks Rank #3.

Other Stocks That Warrant a Look

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

Five9, Inc. FIVN has an Earnings ESP of +1.02% and a Zacks Rank of 2.

Applied Materials, Inc. AMAT has an Earnings ESP of +2.89% and a Zacks Rank #1.

Applied Optoelectronics, Inc. AAOI has an Earnings ESP of +8.12% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

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