By Emily Bary
Alibaba earnings preview: Chinese tech giant is dealing with SEC delisting threat as well as macro and competitive pressures
U.S.-China tensions could once again overshadow Alibaba Group Holding Ltd.'s earnings when the company reports results Thursday morning.
Alibaba's U.S.-listed shares (9988.HK) are coming off their worst month since November 2021, with the stock's 21% July slide punctuated by a delisting threat from the Securities and Exchange Commission. The SEC on Friday included Alibaba on a list of foreign companies whose auditing processes cannot be fully inspected by the Public Company Accounting Oversight Board.
That puts Alibaba's shares at risk of a delisting from the New York Stock Exchange if the company's auditors can't be inspected for three straight years. Executives at Alibaba said in a Monday filing that they would "strive to maintain [the company's] listing status on both the NYSE and the Hong Kong stock exchange."
The company is also dealing with growth challenges and an evolving e-commerce landscape. The Chinese e-commerce company has seen revenue growth slow in recent quarters, with executives highlighting pressures related to COVID-19 lockdowns, a more general consumption slowdown in China, as well as fierce competition.
Amid that storm of challenges, analysts expect Alibaba to post its first-ever year-over-year decline in quarterly revenue since going public, according to data from FactSet and information from Dow Jones Market Data, with sales expected to decrease by roughly $1.5 billion.
When Alibaba posts its fiscal first-quarter results Thursday morning, investors will be looking for signs of improving spending habits as lockdowns eased, though the broader macroeconomic picture could remain challenging. Chinese leaders recently urged stronger provinces to work on meeting growth goals, according to The Wall Street Journal, which could be taken as a signal that high-ranking officials in the Chinese Communist Party no longer think the country will be able to meet its overall growth objectives.
See more: After a rocky stretch, can Alibaba become 'boring but steady' for investors?
Truist Securities analyst Youssef Squali wrote that he saw "Shanghai's easing of COVID-related lockdowns as a positive catalyst for growth in the quarter" and he thought that the company's earnings could "show that the worst may be behind it."
Alibaba's U.S.-listed shares have lost more than half their value over a 12-month span, "and results this week may not matter enough to reverse the downward momentum," according to Mizuho's Jordan Klein, a desk-based analyst associated with the company's sales team and not its research arm.
The stock "feels totally washed out, as do most of the China Internets," he wrote. "That said, I am struggling to find tangible catalysts for this sector to pull in new money given all the China Covid and economic pressures coupled with next catalyst being the govt meetings events in Oct / Nov."
Alibaba's competitive pressures, meanwhile, may take some time to abate. Bernstein analyst Robin Zhu recently highlighted that Alibaba faces competition from live-streaming platforms in China that are limiting the company's own opportunities.
"We think the leveling off of live-streaming e-commerce penetration in China remains 12-18 months away--recent merchant feedback still pointed to ample enthusiasm," Zhu wrote in a July note to clients. "But Alibaba's competitive position should improve on the margin as we get closer."
What to expect
Revenue: Analysts tracked by FactSet expect that Alibaba will report RMB203.9 billion ($30.3 billion) in revenue for the June quarter, down from RMB205.7 billion ($31.8 billion) a year earlier.
Earnings: The FactSet consensus calls for RMB10.70 in June-quarter adjusted earnings per share, down from RMB16.60 in the year-prior period.
Stock movement: Alibaba shares have fallen after 10 of the company's last 11 earnings reports.
Shares of Alibaba are off 25% so far this year, matching losses for the KraneShares CSI China Internet ETF (KWEB). The S&P 500 is down 14% so far this year.
Of the 57 analysts tracked by FactSet who cover Alibaba's stock, 52 have buy ratings, four have hold ratings, and one has a sell rating. The average price target is $153.56.
What else to watch for
Analysts predict continued slower growth in Alibaba's cloud-computing business, with the average estimate calling for RMB18 billion in revenue, up 12% from a year before.
Jefferies analyst Thomas Chong wrote last month that he expected Alibaba's cloud revenue to be impacted by "softness in the internet sector and project delays during the pandemic," though he was upbeat from a long-run perspective. "Cloud computing has clear market leadership as the backbone of digitalization across different industries," he wrote.
'People will freak out': The cloud boom is coming back to Earth, and that could be scary for tech stocks
Another factor to watch for will be Alibaba's spending levels in the wake of more muted consumer activity.
"We noticed Alibaba's advertising activities for 618 were much quieter this year than in previous years," wrote J.P. Morgan analyst Alex Yao, referring to the company's 6.18 shopping festival. "Given management's commitment to costoptimization, we think margins could offer room for positive surprise in coming quarters."
(END) Dow Jones Newswires
August 02, 2022 11:07 ET (15:07 GMT)
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