Will Alibaba’s Earnings Beat Expectations Despite Headwinds?

Alibaba will announce its next earnings report sometime in November (16th) or December, according to various financial websites (Investing.com, Seeking Alpha, Yahoo Finance, and Nasdaq). Annual earnings per share are expected to come in at $15.39, lower than the previous quarter’s reading of $17.37. Revenue is expected to fall to $224.95, down from $234.16 billion previously. On the other hand, according to Zacks Investment Research, based on five analysts’ forecasts, the consensus EPS forecast for the quarter is $1.86, which is higher than the reported EPS for the same quarter last year, which was $1.5.

BABA has dropped from its August highs, and the market seems to have priced in significant pessimism as Alibaba heads into its critical FQ2 earnings release (fiscal second-quarter release) on 16th of November.

Alibaba stock has failed to rise recently due to negative headwinds from China’s property market. Investors are also going to be assessing Alibaba Cloud’s strategic path under its new leadership as well as generative AI developments. Market participants will also be focusing on the upcoming earnings release following China’s Singles’ Day shopping festival which may provide further clues on Chinese consumer demand.

The FQ2 earnings release will mark the company’s first earnings without its ex-Group Chairman and CEO, Daniel Zhang. Joe Tsai has assumed the Alibaba Group chairmanship. Zhang’s role in Alibaba Cloud and his departure has created concerns, and investors will be closely assessing Alibaba’s upcoming report and direction given the changes.

Alibaba’s earnings release will be announced immediately after the end of China’s Singles’ Day shopping festival (October 24 to November 11), which is Alibaba’s most important sales festival of the year. There are concerns, as China’s consumer spending remains moderate. Analysts expect Alibaba to focus on cost optimization as growth may disappoint.

Seeking Alpha reported that analysts’ consensus indicates an 8.8% revenue growth for FQ2, which is lower than the previous quarter’s 13.9% increase. Alibaba’s efficiency drive is anticipated to boost growth with adjusted EBITDA growth expected to reach 12.8% for FQ2.

Analysts have also noted that many investors may be deterred from buying BABA due to geopolitical problems and fears over Chinese President Xi Jinping’s regulatory construct, but some analysts remain confident about the stock. BABA has remained supported above its $78 level since March 2023 and due to its attractive valuation, the stock appears to remain highly appealing.

Alibaba, an e-commerce giant

Established in 1999, Alibaba began as the brainchild of 18 individuals led by a former English school teacher in China, Jack Ma, who believed in the power of the internet to scale small companies enough to compete more effectively in domestic and global technologies. The idea was that by leveraging technology and innovation, just about any enterprise, regardless of its size, could achieve worldwide success.

Alibaba’s primary business is to provide a digital marketplace that connects consumers and merchants to buy and sell from each other. Additionally, the company also offers cloud computing, digital media and entertainment, and more. Its main competitors are said to be Chinese e-commerce and internet companies like Tencent Holdings Ltd, and global and regional e-commerce entities like Amazon.

Today, Alibaba is a holding company of six major business groups: Taobao and Tmall Group, Alibaba International Digital Commerce Group, Cloud Intelligence Group, Local Services Group, Cainiao Smart Logistics Network Limited, and Digital Media and Entertainment Group, along with various other businesses.

Notable developments

AI advancements with Tongyi Qianwen 2.0

According to a 31 October 2023 CNBC article, Alibaba has “launched the latest version of its artificial intelligence model, as the Chinese technology giant looks set to compete with U.S. tech rivals such as Amazon and Microsoft.” The article goes on to say that “Tongyi Qianwen 2.0, its latest large language model (LLM). A LLM is trained on vast amounts of data and forms the basis for generative AI applications such as ChatGPT, which is developed by U.S. firm OpenAI.”

Alibaba to spin off its logistics arm in an IPO in Hong Kong

Alibaba announced its intention to spin off its logistics arm, Cainiao Smart Logistics Network, in an initial public offering in Hong Kong, making it the first business unit to go public following a major restructuring. According to an article by The Independent dated 26 September 2023, “Alibaba said in a filing that it had submitted a spin-off proposal to the Hong Kong Stock Exchange, and that it has received confirmation to proceed. Alibaba will continue to be a majority shareholder in Cainiao, holding over 50% of the company and retaining it as a subsidiary”.

Alibaba to invest $2 billion in Turkey

On 18 September 2023, Reuters reported that “Chinese e-commerce giant Alibaba Group Holding Ltd (9988.HK) has told Turkish President Tayyip Erdogan it plans to invest $2 billion in Turkey”. The investment is intended to be made in Trendyol, in which Alibaba has reportedly already invested $1.4 billion, and holds an 86.5% stake in the enterprise. Trendyol is an e-commerce platform located in Turkey with around 250,000 sellers, over 200 million products and approximately 30 million customers. It delivers to 27 countries across Europe.

Consumer-facing business

In March 2022, the combined annual active consumers of Alibaba Group’s consumer-facing businesses in China reach a historic milestone of over 1 billion.

Operational carbon neutrality

In December 2021, Alibaba announced its commitment to achieve carbon neutrality in its own operations by 2030. This included the introduction of a Scope 3+ target, which aims to facilitate 1.5 gigatons of decarbonization across its business ecosystem by 2035.

Some of the controversies

Alibaba monitored over espionage concerns

On October 5, 2023, Reuters reported that “Belgian officials are looking into risks around the presence of China’s Alibaba Group Holding (9988.HK) at a cargo airport in the city of Liege, the country’s intelligence service, VSSE, said in a statement on Thursday”. The article went on to report that “referring to the company’s main European logistics centre at Liege Airport, the security service said it was working to “detect and fight against possible spying and/or interference activities carried out by Chinese entities, including Alibaba.” Alibaba’s logistics arm, Cainiao, is said to have strongly denied the allegations based on prior conjecture.

Antitrust fine in the billions

In 2021, China fined Alibaba $2.8 billion in a landmark antitrust case, allegedly part of the government’s campaign to tighten its supervision of Big Tech, according to a New York Times piece. The article further reports that the regulator had concluded that “Alibaba’s exclusionary practices had hindered competition in online retail, affected innovation in the internet economy, and harmed consumers’ interests.”

Financial highlights

On 10 August 2023, Alibaba Group announced its financial results for the quarter ended June 2023. Some of the most notable highlights were as follows:

• Revenue was RMB234,156 million (US$32,292 million), an increase of 14% year-over-year.
• Income from operations was RMB42,490 million (US$5,860 million), an increase of 70% year over year. Excluding the reversal of share-based compensation expenses of RMB6,901 million (US$952 million), as discussed in “June Quarter Other Financial Results” found here, income from operations would have increased by 43% year-over-year. Adjusted EBITA, a non-GAAP measurement, increased 32% year-over-year to RMB45,371 million (US$6,257 million).

Stock Exchange listings

Alibaba listed in the United States on 14 September 2014, on the New York Stock Exchange, under the ticker #BABA. As of November 2023, the company has a market capitalisation of approximately $217 billion.

While the company maintained a secondary listing on the Hong Kong Stock Exchange since November 2019, on 26 July 2022, Alibaba (NYSE: BABA and HKEX: 9988) announced that its board of directors authorized the company’s management to apply for a primary listing on the Main Board of Hong Kong Stock Exchange. After completion of the primary listing process, Alibaba will essentially become a dual-primary listed company on the New York Stock Exchange in the form of American Depositary Shares (“ADSs”) and on the Hong Kong Stock Exchange in the form of ordinary shares.

Alibaba leadership and shareholding

On 6 December 2021, Alibaba announced that its Deputy Chief Financial Officer Toby Xu would succeed Maggie Wu as the company’s new CFO, effective 1 April 2022. Additionally, as far as shareholding is concerned, according to Yahoo Finance, the top 25 shareholders own 35% of the company, whereas institutional ownership of the group is 40%.

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