Alibaba profits: after COVID-19 resumption, US-China tensions persist

Alibaba BABA,
+ 0.49%
was already seeing volume growth similar to pre-pandemic levels when it last met with investors in mid-May, and it probably got some new momentum thanks to its mid-year buy event ” 6.18 ”in June. The value of 6.18 orders settled through Alipay on Alibaba’s Tmall Global marketplace increased 43% from the previous year, according to a company blog post after the event.

With this momentum, Alibaba’s volume growth in the June quarter was likely higher than it was in the December quarter, according to Oppenheimer analyst Jason Helfstein, but the key will be how that translates into revenues. Alibaba “still focused on helping traders 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 Increases Demand For Online Connections

Beyond the big trade event, analysts seem encouraged by the Chinese government’s bullish data on online sales of physical goods in June, though they are looking for comment on more recent trends as July statistics have showed a slight slowdown in growth, to 24.5% from 25.2%.

Another issue to watch will be the company’s opinion of the weakening U.S.-China relationship, especially in the tech arena. The White House has taken a tougher stance 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 the 700’s. Tencent Holdings Ltd. ,
-1.17%
TCEHY,
-1.43%
popular WeChat messaging app in USA

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 during the company’s May results that Alibaba’s financial statements “are prepared in accordance with US GAAP accounting standards” and that the company “will endeavor to comply with all legislation aimed at protecting and bringing transparency to investors. who buy securities on the US stock exchanges. “

Read more: The story of two Chinese $ 2 billion IPOs in very different directions

What to expect

Returned: Analysts polled by FactSet expect Alibaba to generate RMB 148 billion, or about $ 21.37 billion, in revenue for the June quarter, up from RMB 114.9 billion a year earlier.

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

Movement of stock: Alibaba shares have fallen on the day of the company’s last three earnings reports, but shares are up 22% so far this year. The KraneShares CSI China KWEB Internet ETF,
-0.92%
is up 41% during this time as an S&P 500 SPX,
+ 0.19%
increased by about 5%.

What else to watch out for

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

Sebastian believes it is possible that Alibaba will exceed estimates in the June quarter due to the “pace of the retail recovery and the impressive surge in cloud adoption.” He rates the stock as outperforming with a price target of $ 275, and he’s optimistic about the company’s cloud trajectory given the increased interest in digital services amid the COVID-19 crisis.

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RBC Capital Markets analyst Mark Mahaney is also encouraged by Alibaba’s cloud potential, which he says represents a “very big $ 30-40 billion market opportunity for the company.” , although he expects competition in this sector to intensify.

“For FQ1, we expect the cloud to grow 58% year-on-year to reach RMB 12.3 billion in revenue, largely in line with the Street, although we believe that competition intensifies of Tencent will temper the segment’s path to medium-term profitability. , “he wrote. Mahaney has an outperformance rating and a target price of $ 235 on the stock.

Oppenheimer’s Helfstein said it was “difficult to ignore the impact of the deteriorating relationship between the United States and China,” but that Alibaba “remains well positioned,” he said. Helfstein is encouraged by data from the Chinese government showing that online sales are becoming a larger part of overall consumption, a trend he believes to be enduring as new shoppers appear to be opening up to the convenience of e-commerce as existing buyers are expanding the categories in which they shop.

Helfstein has an outperformance rating and a target price of $ 290 on the stocks.