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Will E-Commerce Growth Aid Alibaba (BABA) in Q3 Earnings?

Zacks Equity Research

Alibaba Group Holding Limited BABA is set to report third-quarter fiscal 2019 results on Jan 30. In the last reported quarter, the Chinese e-commerce giant delivered a positive earnings surprise of 25.00%.

The surprise history has been decent in Alibaba’s case. The company surpassed estimates in two of the trailing four quarters, with average positive surprise of 5.44%.

Coming to price performance, shares of Alibaba have lost 22.3% in the past year compared with its industry’s decline of 9.6%.

Strength in Alibaba’s Core Commerce Business

This segment comprises marketplaces operating in retail and wholesale commerce in China, and international commerce. Revenues in the last reported quarter were RMB72.5 billion (US$10.5 billion), increasing 56% year over year. The top line is expected to further increase in the quarter to be reported, driven by innovation in data technology, widespread application of big data, as well as increasing validation for Taobao and Tmall portals.

Strong Mobile Growth

In the fiscal second quarter, Mobile Monthly Active Users (MAU) were 666 million, reflecting an increase of 21% year over year and 5% sequentially. The number is expected to increase further, in turn driving revenues of the company. This is because of the increased adoption of mobile devices by consumers as the primary method of accessing Alibaba’s platforms. 

Additionally, it has been witnessing an increase in monetization rates over the past few quarters. The company is building its online marketing inventory on both mobile and PC, and is likely to continue recording higher monetization rates, thereby boosting Alibaba’s profits.

Growing Cloud Momentum

In the fiscal second quarter, revenues were RMB5.7 billion (US$825 million), increasing 90% year over year.

The figure is expected to further increase in the to-be-reported quarter, driven by growth in the number of paying customers and higher-than-usual spending by them, reflecting increased usage of services.

Overhangs Remain

Concerns remain in the form of the company’s heavy spending in new areas of core online retail business, with investments in supermarkets, stores, new artificial intelligence, digital entertainment and cloud computing businesses.

Also, the U.S.-China trade tensions and other political worries may continue to weigh 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 impact its results in the soon-to-be-reported quarter.

Alibaba Group Holding Limited Price and EPS Surprise

 

Alibaba Group Holding Limited Price and EPS Surprise | Alibaba Group Holding Limited Quote

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided, especially when the company is witnessing negative estimate revisions.

Currently, Alibaba has a Zacks Rank #3 and an Earnings ESP of +0.18%, which indicates a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks to Consider

You may also consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank.

Twitter, Inc. TWTR has an Earnings ESP of +26.55% and a Zacks Rank #1.

Square, Inc. SQ has an Earnings ESP of +6.6% and holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lumentum Holdings Inc. LITE has an Earnings ESP of +1.1% and a Zacks Rank #2.

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