What to Watch for in Alibaba's Earnings on Friday

Since reaching a record high in June 2018, Alibaba's stock has lost more than 35% of its value. Here's what to look for when the Chinese commerce giant reports earnings on Friday, Nov. 2.
By Annie Gaus ,

It hasn't been smooth sailing for Alibaba's (BABA) - Get Report stock in the past few months.

Since hitting a record high on June 5, the Chinese Internet giant has lost more than 35% of its value. Among the factors that have weighed on Alibaba's stock are the Internet giant's spending, macroeconomic events such as tariffs and a weakened renminbi, and a general pullback from other Chinese behemoths like Tencent.

In a letter to shareholders on Tuesday, Alibaba's founder and soon-to-retire chairman Jack Ma addressed some of those macro concerns, writing: "This is the third time in Alibaba's 19-year history that we have encountered a setback in the global economy. But our past experience tells us there are huge opportunities behind the anxiety and friction. The only question is how we should pivot."

For investors, the question is how to balance the setbacks that Ma alluded to with the company's long-term trajectory. Here's what investors might out for when Alibaba reports its earnings on Nov. 2.

Core Commerce, Cloud Updates

In its last earnings report in August, Alibaba reported that its core commerce revenues grew 61% year over year to 69.2 billion RMB ($9.9 billion). Anchored by Taobao and Tmall, commerce is Alibaba's largest business unit and top of mind for observers of the stock. This quarter should be no different, with investors looking for updates on core commerce growth, as well as updates on its other major business lines: local services, digital media and entertainment, and cloud computing. Alibaba Cloud, which includes a suite of cloud services, has evolved into a significant player in Alibaba's top-line growth: In August, Alibaba reported that its cloud division grew 93% year over year to 4.7 billion RMB. Another matter of intrigue? A refresh of Taobao's interface currently in progress. In a recent note, Stifel's Scott Devitt looks ahead to "an update on the current Taobao interface / product transition and near- to mid- term implications" expected in Alibaba's upcoming earnings release.

M&A and Expansion Plans

In its last earnings report, Alibaba reported slimmer margins related to a spending spree in the past year, notably investments or acquisitions in a range of businesses, including a $9.5 billion purchase of food delivery platform Eleme and buying a 33% stake in Ant Financial worth billions. Alibaba warned in August that its expansion into new businesses would continue to squeeze margins, writing in an earnings release: "As many of our newly developed and acquired businesses have different cost structures, we expect that our margin will continue to be negatively impacted by these businesses and the accounting treatment of revenue recorded on a gross basis." As such, investors may look for more detail on Alibaba's spending plans, and how many more ambitious deals may be on the horizon -- and what they mean for its margins going forward.

Commentary on Chinese Economy

The dark cloud over Alibaba's business performance and expansion plans are the macroeconomic factors -- such as tariffs and their impact on Chinese consumer spending -- weighing on the stock. As articulated by Atlantic Equities' James Cordwell, "we continue to recommend shares of Alibaba as a core long-term holding but recognize near-term performance is likely reliant on the overall China market picture which is increasingly uncertain." Investors will keep their ears tuned for updates from Alibaba executives on how they're seeing the Chinese macro environment, and what steps Alibaba may be taking in the face of such challenges.

Alibaba's stock rose 2.2% on Tuesday, to close at $136.33.

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