Alibaba Group Holding Ltd Earnings Preview: Stock Rises In Countdown

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Alibaba Group Holding Ltd (NYSE:BABA) is slated to release its FQ3 2018 earnings results on Thursday before the U.S. markets open. The Chinese firm’s stock marched steadily upward on Wednesday, hovering just below the high of $206.20 as the Street counted down the hours before the Alibaba earnings release.

Alibaba stock price target lifted before earnings

In a note to investors this week, Morgan Stanley analyst Grace Chen said she has boosted her price target for Alibaba stock from $220 to $250 per share and maintained her Overweight rating. Her higher price target comes as she shifts her valuation for AliCloud out separately in her sum of the parts and rolls her estimates out to fiscal 2019.

She describes AliCloud as “an emerging enterprise IT leader in China that should challenge traditional hardware and potentially software suppliers.” She sees the cloud business as China’s Amazon Web Services because Alibaba has a clear edge in scale as the biggest e-commerce player in China, meaning that it has high demand for cloud computing in house. She also explained that the Double 11 event has expanded and proven how capable AliCloud is, and it is expanding its offerings from infrastructure-as-a-service to include software-as-a-service.

She expects the Alibaba earnings results to come in close to or higher than consensus. She’s looking for RMB77.3 billion in sales, a 45% year-over-year increase on strong seasonality. She’s expecting adjusted EBITA to rise 20% to RMB30.7 billion with a 40% EBITA margin. The lower margin is due to investments in the company’s core commerce business and New Retail initiatives.

What to expect from Alibaba earnings

In a recent note to investors, Oppenheimer analyst Jason Helfstein offered an Alibaba earnings preview. He feels that the company’s continuing push toward e-commerce personalization via artificial intelligence and media integration will drive its growth, along with AliCloud and physical store exposure.

He noted that Alibaba’s platform has 488 million active shoppers spending US$1,223 every year. He expects the China Commerce segment to show a compound annual growth rate of 38% between 2016 and 2020 as the retail distribution channel becomes more integrated and the B2B business reaccelerates. He also likes Alibaba’s New Retail initiatives, which he expects to “meet the need of [the] Chinese middle-class.”

Helfstein also talked up AliCloud, saying that he expects the segment’s revenues to reach the level were AWS revenues were in 2014 and Microsoft Azure’s were in 2017. He noted that Alibaba’s cloud and Internet infrastructure revenue jumped to RMB6.663 billion in fiscal 2017, while for calendar 2017, cloud revenues hit US$1.6 billion. He added that AliCloud held a 15% share of the public cloud market in China.

Alibaba earnings estimates revised

He also revised his estimates for Alibaba earnings in FQ3 2018. He bumped his China commerce revenue estimate up 4% on stronger-than-expected gross merchandise volume in China and “Other” revenues, which includes Intime, Hema and Cainiao Logistics. He trimmed his EBITDA margin estimate due to higher cost of goods sold and expenses for sales and marketing. He boosted his revenue estimate 4% but cut his EBITDA estimate 2%. He’s now in line with consensus on revenue and EBITDA but below the Street on non-GAAP operating income and EPADS. He’s estimating Alibaba earnings at US$1.64 per share on a non-GAAP basis and revenue at US$12.1 billion.

He maintained his Outperform rating and $220 price target on Alibaba stock going into the earnings release.

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