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Buy Alibaba Stock Before Earnings Despite Coronavirus Setbacks in China?

Benjamin Rains

Alibaba BABA stock has lagged the broader e-commerce market in 2020 and is well behind the S&P 500’s climb from the market’s March 23 lows. Wall Street is clearly worried that the coronavirus will hurt the Chinese e-commerce giant in the near-term even as things slowly return to something close to normal in the world’s second-largest economy.

Alibaba is set to report its March quarter and full fiscal year 2020 results before the market opens on Friday, May 22. Let’s dive into what’s going on with China’s most valuable tech company to see if investors might want to buy BABA stock.

E-Commerce & Beyond

Alibaba reportedly controls roughly two-thirds of China’s e-commerce market, through Taobao and Tmall. BABA has in recent years grown its retail leg within smaller cities as part of China’s middle-class explosion. McKinsey estimates that China’s middle class could hit 550 million by 2022, which is far larger than the entire U.S. population of roughly 330 million.

Last quarter, the company’s annual active consumers across its China retail marketplaces hit 711 million, up nearly 20 million quarter-over-quarter. Meanwhile, BABA’s mobile MAUs jumped roughly 40 million to 824 million. This growth helped Alibaba’s overall quarterly revenue climb 38% to 161.5 billion yuan, or $23.19 billion. But investors should note that these results captured the three-month period that ended on December 31, which didn’t include any significant coronavirus impact.

Alibaba’s core commerce business accounted for 88% of total revenue last quarter, but one of its key non-retail units continued to expand the most on a percentage basis. BABA has invested and expanded its cloud computing business as part of a booming global industry that has helped propel Amazon AMZN and Microsoft MSFT to new heights.  

Cloud computing revenue jumped 62% last quarter to account for 7% of overall revenue. On top of that, BABA’s digital media and entertainment business popped 14%. The company is working to bolster its portfolio with “original content that resonates with Chinese audiences.” And investors should note that China is one of the only places where Netflix NFLX doesn’t operate.

 

 

 

 

 

 

 

 

 

Pandemic Outlook

The nearby chart shows that BABA’s revenue has climbed quickly. But the soon-to-be-reported quarter appears set to showcase the coronavirus impact on the Chinese economy in terms of both supply and demand.

Our current Zacks estimates call for Alibaba’s quarterly sales to climb just 9.7% to come in at $15.28 billion. This would mark by far its slowest top-line growth as a public firm—BABA went public in the U.S. in 2014.

The company’s adjusted earnings are projected to tumble -31.3% from the year-ago period to hit $0.88 a share. Despite these projected near-term setbacks, Alibaba is projected to return to stronger growth next quarter and its adjusted fiscal year EPS figure is still expected to climb 28%.

In fact, the pandemic could help speed up e-commerce growth in China and elsewhere. Plus, Alibaba has seen its earnings estimates climb for next year.  

 

 

 

 

 

 

 

Bottom Line    

Alibaba’s quarterly outlook appears rough, but roughly 10% top-line growth during these unprecedented times is a good sign. Plus, China might already have the worst of the coronavirus in its rearview mirror, while the full impact likely won’t be felt until Q2 for many U.S. companies. Therefore, investors might soon start to treat BABA as a safe-haven and stay-at-home play, with tons of long-term growth potential.

Alibaba is currently a Zacks Rank #2 (Buy) that sports “B” grades for both Value and Growth in our Style Scores system. BABA trades at 5.2X forward 12-month Zacks sales estimates. This comes in well below its 12-month highs of 8.5X and Microsoft’s 8.9X.  

The company is also part of our highly-ranked Internet – Commerce industry. And BABA shares sit around 13% off their highs heading into earnings, which could give them room to run if the e-commerce powerhouse is able to impress.

Clearly, the near-term uncertainty makes diving all in on any stock unwise, much less a retailer in China. Yet, longer-term investors might want to keep their eyes on Alibaba.

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