Alibaba Group Holding Ltd FQ1 2018 Earnings Preview: Cloud & Commerce

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Alibaba FQ1 2018 earnings are expected before opening bell on Aug. 17, and analysts are expecting solid results again from the China-based cloud and retail giant. Barclays analysts raised their target price for the company in a note last week, while Deutsche Bank analysts left their price target and focused on Alibaba’s cloud business.

Alibaba FQ1 2018 earnings: strong cloud results

In a note dated August 4, Deutsche Bank analyst Alan Hellawell said that Alibaba FQ1 2018 earnings will benefit from the company’s continuing dominance in the Chinese infrastructure-as-a-service industry. However, his firm’s survey of CIOs showed a slight downtick in Alibaba’s popularity in the business, down to 54% this year from 65% last year in a single-vendor scenario and down to 59% from 79% last year in a multi-vendor strategy.

He explained that Alibaba Cloud has been very successful among small- to medium-sized enterprises, and he expects it to benefit even more by “cultivating expertise and experience to serve large enterprise,” especially as competition from other Chinese vendors rises. Despite Alibaba’s falling popularity and the rising competition, he maintained his Buy rating “in appreciation of monetization from core commerce.” He also maintained his $201 target price on Alibaba.

Cloud revenue estimates cut

Hellawell predicts strong net adds for Alibaba Cloud, as he expects its paying customer base to keep growing at its three-year compound annual growth rate of 58% from fiscal 2017, reaching 2.8 million by fiscal 2020. He also predicts additional deep price cuts, both by Alibaba Cloud and its competitors. Despite these price cuts, he expects average revenue per cloud user to continue rising through fiscal 2020.

He trimmed his revenue estimates for the Cloud segment, lowering his calendar 2019 estimate by 3% and his 2020 estimate by 8% to account for competitors’ “aggressive” expansion. However, he maintained his fiscal 2018 estimate and valuation, predicting Cloud revenue to reach RMB42 billion.

Alibaba FQ1 2018 earnings driven by core commerce

Barclays analyst Gregory Zhao reiterated his Overweight rating but boosted his price target to $180 from $175 leading up to the Alibaba FQ1 2018 earnings release tomorrow. He noted that Alibaba’s core e-commerce business will continue driving its results for now, but he added that New Retail will likely shape its long-term business model. The New Retail Strategy includes segments such as HeMa Supermarket.

His positive view on Alibaba’s core commerce business is supported by growing return on investment as the company drives its Personalization algorithm and by accelerating online sales growth. His channel checks indicate that Alibaba’s Personalization algorithm continues to improve the efficiency of its marketing efforts.

Zhao noted that Alibaba continues to set up more HeMa stores throughout China, so he expects the company to increase the integration of its online and offline offerings. As of June, Alibaba owned 12 HeMa Fresh stores, including two in Beijing and ten in Shanghai. He expects the company to grow this segment to 22 stores by the end of fiscal 2018 and projects 4,000 orders from each store per day. He forecasts CNY2.5 billion in sales for the business in fiscal 2018.

A week before Alibaba FQ1 2018 earnings are due to be released, the company’s stock ticked slightly higher, rising as high as $159.50 during regular trading hours.

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