Alibaba Q2 earnings preview: Where next for BABA stock?

When are the Alibaba Q2 earnings?

Alibaba is scheduled to release second quarter earnings covering the three months to the end of September before US markets open on Thursday November 17. A conference call will be held at 0730 ET, or 2030 in Hong Kong.

Chinese stocks rise on government support

Before we dig into Alibaba, it is worth noting significant developments that have provided support to Chinese firms and raised hopes that the outlook in China is improving and that frosty relations with the US could thaw.

We discovered on Friday that some of the latest Covid-19 restrictions have been loosened. Quarantine times have been cut. Fines for airlines bringing in cases have been reduced, and it has stopped tracing secondary cases. That has provided hope that Beijing’s staunch commitment to its zero-tolerant approach to the virus could start to give way to economic concerns. China is now accelerating vaccinations, which is seen as key if the rules are to be relaxed further.

It is one of the most significant easing of the rules we have seen so far and some analysts have described it as the beginning of the end of zero-Covid, but investors should tread carefully. The president of the European Chamber of Commerce in China, Joerg Wuttke, described it as ‘a baby step in the right direction’. Meanwhile, the National Health Commission of China described the latest changes as ‘optimising and adjusting’ rules and said this is ‘not relaxing prevention and control, let alone opening up’.

Still, the government is trying to stabilise the economy and provide some support after GDP growth stalled to its slowest rate since the start of the pandemic in the three months to the end of June. It has just outlined its most comprehensive package of support for the struggling property sector that is thought to account for around one-quarter of the economy. The 16-point plan aims to boost liquidity after suffering from defaults and project delays that have rocked confidence and sentiment. Tao Wang, the chief China economist at UBS Investment Bank Research, has said it now sees ‘property being much less of a drag to GDP growth in 2023’ as a result while Citi said it marks a pivot from imposing restrictions to providing support. That, in turn, means it should prove beneficial for the wider economy.

Elsewhere, the G20 summit has seen Chinese president Xi Jinping and US president Joe Biden meet for the first time. They both stressed they were hoping to ‘find the right direction’ for their relationship and ‘manage our differences’, according to the BBC. Biden said after the three-hour meeting that the two countries will continue to ‘compete vigorously’ but that he wasn’t looking for ‘conflict’. Meanwhile, Xi is reported to have warned POTUS about crossing a ‘red line’ over Taiwan, prompting Biden to say he did not think any invasion of the self-governing island was imminent or that the two countries will end up in a Cold War. The meeting has been regarded as positive, but markets should remain wary given there is no path to agreement on an array of key issues.

Alibaba Q2 earnings consensus

Analysts forecast Alibaba will report a 4.3% rise in revenue from last year to RMB209,243 million and adjusted Ebita is expected to increase 19% to RMB33,376 million. The consensus has pencilled-in RMB11.23 of adjusted diluted earnings per ADS for the quarter, up 0.2% from the previous year.

Alibaba Q2 earnings preview

Things remain tough for Alibaba. We have seen growth from ecommerce stall and its digital media and entertainment arm is forecast to deliver its third consecutive decline in quarterly revenue. Meanwhile, its cloud computing arm is expected to see sales rise at its slowest pace on record at just 5.5%.

However, we could see Alibaba post its first improvement in adjusted Ebita margin in years, sending a signal it could be starting to prioritise profitability over growth as the economic outlook heading into 2023 remains clouded and uncertain. We have already seen signs that Alibaba is shifting its focus on improving the economics of its operations from delivering rapid growth. That is expected to result in a 19% year-on-year rise in adjusted Ebita to RMB33,376 million.

Analysts believe this will be driven by smaller losses from food delivery service Ele.me and ecommerce firm Lazada, which are both expected to have benefited from far better economics this quarter compared to last year and show it is getting a better grip on costs. That should contribute to stronger growth in adjusted Ebita from its core commerce operation and its digital media and entertainment arm is also forecast to post strong double-digit Ebita gain of 26%. That will help counter a 10% drop in Ebita from its cloud computing arm, according to forecasts.

Alibaba has not been providing forward guidance, but markets believe revenue and earnings growth will both accelerate in the third quarter. Notably, Alibaba held its 11.11 shopping event that celebrates Singles Day during the period that showed the value of goods sold was level with last year, suggesting commerce demand has not improved. Markets think digital media and entertainment will remain under pressure but see cloud computing sales starting to reaccelerate again.

Where next for BABA stock?

Alibaba shares hit their lowest level in almost seven years late last month but has since found higher ground amid a broader rally in Chinese stocks.

The stock is currently testing $73.30 low we saw back in March. Recapturing this would allow it to target the 50-day moving average before $82, the level of support we saw back in April and May, comes onto the radar. A move to $88, the floor seen throughout August, would be possible from here.

Notably, the 47 brokers that cover Alibaba see much greater upside with an average target price of $137.49, some 90% higher than current levels. However, we have seen that been curtailed considering that sat over $157 just three months ago.

On the downside, the recent closing-low of $63.20 has been tested on several occasions during the last two weeks and looks like a solid floor that should hold firm. Notably, when it first hit it on October 24 we saw the RSI pushed into oversold territory, tight trading and an explosion in volumes to suggest this is the point where buyers and sellers became evenly matched. Any slip below here brings the February-2016 low of $60 and the all-time low of $57.30 into play.  

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