Alibaba Profit: The effect of China's slowdown in e-commerce spending is a key factor



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Amid investor uncertainty over the state of the Chinese economy and the effect of trade tensions, Alibaba Group Holding Ltd. will provide its opinion on consumer spending in the country on Wednesday.

The Chinese e-commerce giant is expected to release third-quarter fiscal results before the market opens on Wednesday. The results of the company's holiday period will show if it also suffered from a general slowdown in e-commerce spending that the Chinese government reported for the December quarter.

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Baird analyst Colin Sebastian said that Alibaba

NANNY, -0.14%

may be more immune than others to some of the macroeconomic issues that affect spending levels in the country, as expensive items such as electronics and appliances are among the categories most affected by China's slowdown. Still, he recently cut his estimates for Alibaba's end-March fiscal year "to reflect China's less favorable macroeconomic scenario."

Sebastian noted that growth has increased a bit in the month of December, so investors should pay close attention to management's commentary on the spending scenarios for signs of recovery. It ranks the stock in outperform with a target price of $ 178.

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What to expect

Earnings: Analysts surveyed by the FactSet project Alibaba reported $ 1.69 in adjusted earnings per share for the December quarter, up from $ 1.63 a year earlier. According to Estimize, which sources of crowdsourcing estimate from hedge funds, academics and others, the average projection is $ 1.67 per share in profits.

US dollar quotes on FactSet convert RMB into dollars at the time analysts issue their notes, which may lead to inconsistent currency conversions with the figures provided by Alibaba, as the company uses the conversion rate of the last one day of the quarter. On a renminbi basis, the FactSet consensus requires RMB 11.42 in earnings per share, up from RMB 10.26 a year earlier.

Recipe: Analysts monitored by FactSet called for $ 17.6 billion in third-quarter fiscal revenue, up from $ 12.8 billion a year earlier. The Estimize consensus is $ 17.3 billion. In terms of renminbi, analysts polled by FactSet demanded RMB 119.1 billion in revenue for the December quarter, compared with RMB 80.3 billion in the same period last year.

Inventory movement: Alibaba's US deposit claims rose after five of its last 10 earnings reports. Stocks rose 11% in the last three months, compared with a 0.7% decline for the S & P 500

SPX, -0.10%

. Of the 53 analysts polled by FactSet tracking stocks, 52 have buying ratings and one has a sales rating. The average target price is $ 204.27, 28% above recent levels.

What else to watch

Alibaba's cloud computing business will be again in focus this quarter, although it accounts for a small part of the company's total revenue by approximately 7%. "We believe the company's focus on the cloud continues to be customer growth and market share, not profitability," wrote Mark Mahaney, an analyst at RBC Capital Markets, which ranks the best performing stocks with a US price target $ 200.

Margin commentary around the cloud business and other areas of Alibaba are of interest to Rob Sanderson, an analyst at MKM Partners, who expects Alibaba's competitors to reduce their "spending intensity" for the current year. He is interested in Alibaba's spending plans around video content and food delivery, which are damaging to the margins of the company.

Read: Alibaba, Baidu among shares of Chinese technology major trading after Beijing announces economic growth efforts

As for the Alibaba cloud segment, Sanderson predicts the business is "approaching its margin pivot." It has a purchase classification and a target of $ 245 in Alibaba shares.

Analysts are also looking for updates on the company's "new retail" initiatives, which are focused on merging online and offline commerce. The company runs the Hema supermarkets that are modeled on the online / offline concept, and Jefferies analyst Karen Chan is interested in the measures that Alibaba can take to help in the long-term margin profile of these efforts, which in its view , could include a delivery fee for each online order. Chan classifies the shares as a purchase with a target price of $ 195.

The quarter included Singles Day, the biggest shopping event of the year. Alibaba has made efforts to incorporate Ele.me, its food delivery business, and Hema, the new retail grocery stores, into its Singles Day offerings. Look for management updates on whether shopping extravagance has had lasting effects on the market. use of these Alibaba services.

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Also note the comments around Alibaba.com, the company's business-to-business platform. Alibaba has been making improvements to the platform to make it more like a market, in the model of its Tmall and Taobao consumer sites.

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