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Alibaba earnings: After COVID-19 recovery, U.S.-China tensions still loom

Earnings Outlook

Earnings preview: Analyst says it’s ‘difficult to discount the impact of worsening U.S./China relations’ amid apparent bounceback

Alibaba’s midyear shopping festival saw greater volume than last year’s in an encouraging sign of China’s recovery from the COVID-19 crisis.


Gilles Sabrie/Bloomberg

Though geopolitical tensions loom, Alibaba Group Holding Ltd. seems to be in a good spot as China continues its economic recovery from COVID-19.

Alibaba reports fiscal first-quarter earnings Thursday morning.

Alibaba
BABA,
+0.53%

was already seeing volume growth similar to pre-pandemic levels when it last addressed investors in mid-May, and it likely got a further boost from its “6.18” midyear shopping event in June. The value of 6.18 orders settled through Alipay on Alibaba’s Tmall Global marketplace was up 43% from a year earlier, according to a company blog post after the event.

With that momentum, Alibaba’s June-quarter volume growth was likely ahead of what it was in the December quarter, according to Oppenheimer analyst Jason Helfstein, but the key will be how that translates into revenue. Alibaba “is still focusing on helping merchants recover from COVID-19, and revenue growth is expected to be slower than [gross-merchandise volume],” he wrote.

Read: Alibaba adds more digital features for B2B customers as COVID-19 boosts demand for online connections

Looking beyond the big shopping event, analysts seem encouraged by upbeat Chinese government data on online sales of physical goods in June, though they’ll be looking for commentary on more recent trends given that the July statistics showed a slight slowdown in growth, to 24.5% from 25.2%.

Another issue to watch for will be the company’s view on weakening relations between the U.S. and China, particularly in the realm of technology. The White House has been taking a harder line on Chinese apps lately, with President Trump issuing executive orders that give Chinese company ByteDance 90 days to divest itself of assets related to its popular TikTok service and seek to shut down Tencent Holdings Ltd.’s
700,
-1.17%

TCEHY,
-1.77%

popular WeChat messaging app in the U.S.

The Trump administration also wants stricter auditing standards for Chinese companies that list their shares on U.S. stock exchanges. Alibaba Chief Financial Officer Maggie Wu said on the company’s May earnings call that Alibaba’s financial statements “are prepared in accordance with U.S. GAAP” accounting standards and that the company “will endeavor to comply with any legislation whose aim is to protect and bring transparency to investors who buy securities on U.S. stock exchanges.”

For more: A tale of two $2 billion Chinese IPOs headed in very different directions

What to expect

Revenue: Analysts surveyed by FactSet expect that Alibaba generated RMB 148 billion, roughly $21.37 billion, in revenue for the June quarter, up from RMB 114.9 billion a year earlier.

Earnings: The FactSet consensus calls for RMB 13.82 in adjusted earnings per share, up from RMB 12.55 a year prior.

Stock movement: Alibaba shares have fallen the day of the company’s last three earnings reports, but shares are up 22% so far this year. The KraneShares CSI China Internet ETF
KWEB,
-1.34%

is up 41% in that time as the S&P 500
SPX,
-0.44%

has increased about 5%.

What else to watch for

“Given the clear recovery of Chinese consumer spending, coupled with signs of sustainability in e-commerce growth, we believe Alibaba remains well-positioned to accelerate growth over the balance of the year,” Baird analyst Colin Sebastian wrote in a July 16 note to clients.

Sebastian sees room for Alibaba to exceed estimates in the June quarter due to “the pace of retail recovery and impressive ramp in cloud adoption.” He rates the stock at outperform with a $275 price target, and he’s upbeat about the company’s cloud trajectory given heightened interest in digital services amid the COVID-19 crisis.

Don’t miss: Beyond Meat partners with Alibaba for new China push

RBC Capital Markets analyst Mark Mahaney is also encouraged about Alibaba’s potential in the cloud, which he said represents a “very large $30 billion to $40 billion market opportunity for the company,” though he expects that competition in this business has intensified.

“For FQ1, we expect cloud to grow 58% year over year to RMB 12.3 billion in revenue, largely in line with the Street, though we believe the step-up in competition from Tencent will temper the segment’s path to profitability in the medium term,” he wrote. Mahaney has an outperform rating and a $235 price target on the stock.

Oppenheimer’s Helfstein said that it’s “difficult to discount the impact of worsening US/China relations” but that Alibaba “remains well positioned,” in his view. Helfstein is encouraged by Chinese government data indicating that online sales are becoming a bigger part of overall consumption, a trend he deems sustainable given that new buyers seem to be opening up to the convenience of e-commerce while existing buyers are expanding the categories in which they make purchases.

Helfstein has an outperform rating and $290 price target on the shares.

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