Getty Images
Alibaba Group Holding Ltd.’s complicated corporate structure will have a new dimension when the company reports fiscal fourth-quarter earnings Friday, before the open.
The Chinese e-commerce giant said last quarter that it had taken a 33% stake in Ant Financial, the payments affiliate that was part of Alibaba before the company’s IPO. Previously, Alibaba had a profit-sharing arrangement with Ant in which it received 37.5% of pretax profits.
News of the arrangement wasn’t immediately well received by investors, who sent shares down 5.9% the day of the last earnings report, in part due to concerns that Alibaba was giving up more than it was getting. Many believe the new setup is meant to help Ant prepare for a potential IPO. The Wall Street Journal recently reported that Ant was trying to raise $9 billion in a private funding round, which could value the company at nearly $150 billion.
As such, Ant will be in focus again this quarter when the company posts numbers and provides commentary on the earnings call.
Ant benefits when Alibaba succeeds in its retail initiatives, of course, because consumers use the Alipay product to pay for items. But Ant’s services go beyond traditional payment processing and include things like wealth management, which give Ant a more diversified revenue stream that’s not as tied to Alibaba’s performance.
“Currently, Ant’s payment services cover 13 different consumption scenarios, including online shopping, retail stores, gaming, daily household, dining, money transfer, public welfare, credit, financial services, mobile top-up, campus, transportation, and medical services,” wrote Barclays analyst Gregory Zhao, who rates Alibaba’s stock at overweight with a $220 target price.
Zhao said that his conversations with Ant’s management indicate that the broad suite of offerings are gaining steam, as Alibaba-related payment volume is less than 10% of Ant’s total payment volume.
Both Ant and Alibaba are trying to expand internationally, and they’ve backed an Indian payments company called Paytm Payments Bank in an attempt to gain ground there. Other countries besides China aren’t necessarily as conducive to new payments entrants, so it will be interesting to hear the company’s commentary about how expansion efforts are progressing.
What to expect:
Earnings: Analysts surveyed by FactSet expect that Alibaba grew earnings to 85 cents per share in its March quarter from 63 cents a year earlier. According to Estimize, which crowdsources estimates from hedge funds, academics, and others, the average projection calls for 97 cents in per-share earnings.
Revenue: Analysts polled by FactSet predict revenue of $9.3 billion for the March quarter, up from $5.6 billion a year earlier. The Estimize consensus calls for $9.4 billion.
FactSet’s consensus numbers project gross merchandise volume of $177.1 billion during the quarter, up 39% from a year ago.
Stock movement: Alibaba shares have risen after six of the company’s last 10 earnings reports. The stock is up 56% over the past 12 months, while the S&P 500 has gained 10%.
Wall Street sentiment is overwhelmingly positive. Of the 50 analysts who cover Alibaba, according to FactSet, 49 analysts rate the stock the equivalent of buy, and one rates it a hold. The average price target is $224.10, about 23% above current levels.
The stock gained 0.5% in morning trade Thursday, putting it on track to post a fifth-straight gain leading up to results.
Famed short seller Andrew Left of Citron Research came out with a rare bullish call on Wednesday, saying Alibaba’s stock “was on its way to $250,” as he believes the company is “the most compelling growth story in the market” as well as the world’s most heavily shorted stock.
“The professionals at Citron have been shorting stocks for a combined 100 years and wonder: ‘Why be short the most compelling [total addressable market] situation in the history of the stock market?’” Citron’s research note said.
What else to watch for:
Retail operations certainly remain of key importance for Alibaba investors, and some analysts see positive macro signs ahead of the release.
“Through the first 2 months of 2018, NBS reports accelerating growth for online retail sales of physical goods, up 35.6% year over year, with the food category leading up 57.3% year over year. We believe these data points bode well for top line results,” wrote SunTrust Robinson Humphrey analyst Youssef Squali, who refers to China’s National Bureau of Statistics.
He’ll be paying attention to what the company has to say about its “new retail” initiatives, which are aimed at merging online and offline commerce. “The company is using owned and operated stores as a test bed for innovation, digitizing the supply chain and inventory management, as well as reinventing the customer experience. The true pay off should come in the form of a SAAS-like offering, in our view, as the company shifts to more of a technology enabler for the offline world,” he wrote.
Squali called the new-retail efforts “largely misunderstood.” He has a buy rating on Alibaba’s stock and a $225 price target.
Investors will more generally be watching for indications about Alibaba’s investment spend and what the company’s priorities are there. “We believe ongoing investments in new retail and the increasing mix of lower margin businesses (Cainiao) will likely weigh on the company’s overall profitability more than we had previously anticipated,” wrote Stifel analyst Scott Devitt, who recently lowered his Ebitda margin estimates to 32% from 35%. (Ebitda refers to earnings before interest, taxes, depreciation, and amortization, and Cainiao is a logistics company that Alibaba now has a majority stake in.)
One thing analysts also want more information about is Alibaba’s recent acquisition of Ele.me, the leading food delivery platform in China. The transition has an implied enterprise value of $9.5 billion for Ele.me, according to Devitt, who rates Alibaba’s stock a buy with a $260 target.
“We believe the acquisition will serve as a complement to Koubei, Alibaba’s local services platform, and allows the company to expand its total addressable market by tapping into the food-delivery/restaurant category,” he wrote. Management will likely share more information about plans for Ele.me during the company’s call.
As for Alibaba’s cloud business, UBS analyst Jerry Liu noted that the company launched its first data center in Indonesia during the quarter, which he said is “mainly focused on demand from local SMEs and start-ups.” The cloud is another area where Alibaba sees large opportunities for international growth.
Liu rates Alibaba shares a buy with a $240 price target.