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Bear of the Day: Alibaba (BABA)

Kevin Cook
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Alibaba Group (BABA), perceived as the "Amazon of China," is a must-own franchise for some investors -- myself included. But lately, the majority of analysts have been bringing down their earnings growth estimates and this pushed the stock into the cellar of the Zacks Rank last week.


From the different analyst reports I've read, there are multiple headwinds causing them to lower EPS projections, including growing competition in e-commerce and cloud services, economic slowing in China and RMB currency depreciation, a one-time step-up in stock compensation related to Ant Financial’s recent financing, and overall increasing investments by Alibaba that will hurt profitability.


To be sure, the cloud business is still a big double-digit growth center and the company remains confident on its core e-commerce business, with the support of its New Retail strategy and FashionAI. 


China's e-Commerce market is expected to pass $1.1 trillion in 2018. Since Alibaba that dominates the world’s largest e-commerce market, the advantage over competitors is clearly theirs to lose.


The Estimate Revisions Dictate the Zacks Rank


The Zacks Rank is purely a relative reflection of analyst EPS moves over the past one to three months, with over 4,000 companies battling it out in what I like to call a "bell curve cage match."


In this way, it is an ideal short-term indicator from quarter to quarter as investment bank teams do their homework and adjust their sales and earnings models before and after company reports.


For BABA, in the past 60 days, the EPS consensus for fiscal year 2019 (began this April) has fallen from $6.67 to $6.48.


For FY 2020, the consensus projection has dropped from $8.78 to $8.54.


But these declines are less than 3% annually. And that's why investors need to keep the big picture in mind for this global growth franchise that is nowhere near done positioning itself to profit from the largest middle class in the world.


The Amazon-Sized Opportunity


Indeed, when co-founder Jack Ma came to the U.S. to do a series of investor presentations, what was so memorable was how he answered a question about his mission.


A reporter asked, "Is your goal to get US consumers to use Alibaba to shop for Chinese goods?"


Ma essentially answered the opposite, saying that he wanted to invite U.S. businesses to use the Alibaba gateway to sell their products to the biggest consumer class on the planet.


That's why these growth projections still look so attractive to large investors who understand the potential...



Alibaba isn't scheduled to report its FY19 Q1 earnings until mid-August so the stock and the estimates could remain stuck in limbo. But there's always a decent chance that Chairman Ma surfaces with a pre-announcement and blistering new growth guidance as he has before.


That would get the estimates going back up. Until then, we have to stay on the sidelines, or take some profits as I recently did for the Zacks TAZR Trader when we cashed in our remaining BABA shares purchased in February of 2017 for an 81.5% gain.


Either way, I'm looking forward to the opportunities with this must-own global franchise that will easily trade this time next year at 30 times $8.00 EPS, or $240.


See you there!


Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the Healthcare Innovators and TAZR Trader services. Click Follow Author above to receive his latest stock research and macro analysis.


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