Alibaba Q3 earnings preview: Where next for BABA stock?

Key takeaways

• Alibaba is one of several big Chinese tech firms to report earnings this week, alongside Baidu and NetEase.
• Alibaba is countering slower growth with lower costs
• Focus is on whether the reopening of China can improve the outlook for 2023
• Some investors are calling for faster growth and for more cash to be returned to shareholders

 

When will Alibaba release Q3 earnings?

Alibaba will release third quarter earnings covering the three months to the end of December 2022 before US markets open on Thursday February 23. A conference call will be held on the same day at 0730 ET (2030 HKT).

 

Alibaba Q3 earnings consensus

Alibaba is forecast to report a tepid 1.4% rise in revenue in the third quarter to RMB245,875 million and adjusted EPS is expected to fall 5.2% from last year to RMB15.99.

 

Alibaba Q3 earnings preview

It is a big week for Chinese stocks with a number of tech firms set to report results, with internet search giant Baidu, gaming firm NetEase and video platform iQIYI all pencilled-in the calendar. Investors will be keen to hear how the Chinese consumer is faring since the country abandoned its fight against Covid-19, which should prove supportive for the outlook in calendar 2023.

Chinese stocks listed on American exchanges have gained ground in early 2023 as optimism around their prospects has improved now that the country is putting Covid-19 behind it. Plus, the regulatory crackdown that has hurt the tech industry for years is finally abating. The S&P US Listed China 50 index is up over 9% year-to-date, but it has lost steam since peaking in late January amid a lack of new catalysts. Notably, the index is still well below pre-pandemic levels.

Atop the agenda this week is Alibaba. It can sometimes be forgotten that Alibaba is an ecommerce giant first and everything else second. Three quarters of its revenue comes from commerce and the bulk of that is from China, which generates all the profits that are swallowed up by its other businesses from cloud computing to digital media and entertainment.

(Source: Estimates from Bloomberg)

With this in mind, commerce sales in China have been suffering this financial year as persistent lockdowns caused a slump in sales and the rise in demand we saw during the initial stages of the pandemic unwinds. Revenue from commerce in China is expected to be down 3.5% in the third quarter compared to the year before. Lower sales have also hit earnings, with operating profit from the core unit to be down 11% this quarter.

There will also be some fresh fears over profitability of the core commerce business following news that JD.com is planning to launch a new subsidy campaign worth some CNY10 billion, roughly $1.5 billion, sparking fears that a new price war could erupt within the Chinese commerce market.

Plus, its other loss-making units are also starting to see growth slowdown. Demand for digital media and entertainment is waning as consumers become more cost-conscious, while the brakes have also started to come down on the cloud computing unit as businesses become more disciplined with their spending.

Still, overall operating income is forecast to come in at RMB35,744 million in the third quarter, some five times higher than the year before. That will be the second consecutive quarter of improvement thanks to a sharp drop in costs as Alibaba concentrates on becoming more efficient, as well as significantly narrower losses from digital media & entertainment, cloud computing and international commerce. Some analysts believe the company could also start prioritising profits over growth from its core commerce business going forward, which would be a big change. Regardless, this shows Alibaba is successfully countering slower topline growth with a sharp focus on cost control.

Markets believe Alibaba can eek out revenue and earnings growth over the full year to the end of March 2023, and confirmation would be welcomed by the markets. The landscape for the new upcoming financial year looks rosier as markets hope market conditions will improve and Alibaba will enjoy a leaner and more efficient cost base.

 

Can Ryan Cohen influence Alibaba?

Meanwhile, Alibaba is also facing some new shareholder pressure. Billionaire investor Ryan Cohen - known for founding online pet store Chewy and for taking charge of video game retailer GameStop - has built a stake in the Chinese giant worth hundreds of millions of dollars and is pushing the board to up its performance, according to media reports. He is thought to have originally reached out to Alibaba last August to express his concerns and outline his view that Alibaba could grow sales by double-digit percentages and grow free cashflow by up to 20% over the next five years.

He is also thought to be pushing for the firm to accelerate share buybacks. Cohen is reported to have told the company that the current share buyback programme, which was raised to $40 billion last November, could be upgraded closer to $60 billion.

However, some analysts are doubtful on his ability to influence the board of the Chinese firm, especially after the government took so-called golden shares that gives it the ability to sway major decisions at Alibaba and other firms including Tencent. It is unlikely that Alibaba will change course as a result of Cohen, but any signal that it is taking his comments into account would be bullish if it leads to improved growth and returns.

 

Is Alibaba joining the AI race?

A new race for supremacy in the artificial intelligence space has kicked off following the huge success of chatbot ChatGPT. We have now seen Alphabet, Microsoft and others set out their stall as they look to get ahead in a nascent market offering unlimited potential, and Chinese firms are also racing to catch up.

Alibaba and Baidu are both thought to be investing in their own versions of ChatGPT and preparing to unveil them this year, while NetEase is also working on some new AI-driven products. Baidu is at the forefront with its chatbot named Ernie that will be added to its search engine in the coming months, but we have not heard much from the other players.

Alibaba therefore has an opportunity to show it has concrete plans to compete. Shares jumped over 3% when reports it was working on a ChatGPT rival surfaced earlier this month, showing the potential seen by investors.

However, some analysts have flagged that Chinese rivals may struggle to compete with Western rivals due to restrictions on China’s ability to source high tech solutions from the US and a lack of high-quality Chinese language text, which is what feeds AI chatbots, available on the internet. Chinese firms are entering the race but are yet to show whether they have the legs to compete with the current frontrunners.

 

Where next for BABA stock?

Alibaba shares are down 3.4% in extended hours trade today and poised to open at their lowest level in seven weeks as reports of a price war weigh on Chinese commerce stocks. The stock is now down over 20% since hitting six-month highs in late January. Alibaba has been the third most traded stock among StoneX Retail clients since the start of 2023.

The stock has now slipped below the 50-day moving average for the first time in three months. We could see the stock slip as low as $85.75 if it remains under pressure, in-line with the level of resistance-turned-support that can be traced back to October. Below here, we could see it move south of $80.

In terms of the upside, we are going to turn to the weekly and monthly charts. The monthly chart suggests the next key upside target is $113.70. Shares have tried and failed to surpass this level on numerous occasions since March.

The weekly chart suggests that a break above $120 would then be on the cards, considering this have proven to be a firm ceiling that has been unsuccessfully tested eight times in the past year.

The 47 brokers that cover Alibaba see significant upside potential from current levels with the average target price sat at $143.

 

 

Take advantage of extended hours trading

Alibaba will release earnings before US markets open and most traders must wait until they open before being able to trade. But you can get ahead of the game by taking a position in premarket hours by taking advantage of our service that allows you to trade Alibaba and other stocks using our extended hours offering.

While trading before and after hours creates opportunities for traders, it also creates risk, particularly due to the lower liquidity levels. Find out more about Extended Hours Trading.

How to trade Alibaba stock