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Earnings: Might BABA Report Blockbuster Earnings Again?

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November 1, 2016
Stock market analysts discuss upcoming Alibaba Group earnings report

(Editor’s note: This article was updated on November 3 to include information on Alibaba’s efforts to address counterfeit goods in their marketplaces.)

In June, Alibaba Group (BABA) reported quarterly earnings per share 33% higher than the prior year on topline sales up 59%, allaying some fears that China’s economic woes would spill into the e-commerce sector. Will BABA report another outsized gain when earnings are posted ahead of the market open Wednesday?

According to a number of Wall Street analysts, the answer may be “yes.” Analysts from Citigroup, JP Morgan and Goldman Sachs, for example, have all put out research notes in the last week forecasting robust double-digit growth in BABA’s sales and profits for its fiscal second quarter. Of the 39 analysts who cover the China-based company, 35 have “buy” ratings on its stock.  

But they likely will have plenty of questions. On Monday, BABA announced that it was putting up $1.48 billion to fund a new subsidiary that will consolidate its media domain into the Alibaba Digital Media and Entertainment Group. Reports said BABA would use the fund to step up its investments in video and live streaming, for example, and in Hollywood films such the latest “Mission Impossible” movie. Last month, BABA also bought a share in Amblin Partners, a content creation company in which stakeholders include Steven Spielberg. What are its future plans for that division? And what about the giant’s other segments, such as its core e-commerce business Alibaba.com, its cloud-computing venture, and its innovation segment?

Also last month, a number of retail trade groups joined the call for the U.S. Trade Representative to put BABA back on the list of “notorious” marketplaces known for counterfeit or pirated goods, according to Dow Jones. BABA is taking steps to resolve the issue, and on Oct. 7 the company submitted details of its anti-counterfeiting efforts to the USTR.

And finally, analysts say they are looking for more insight into BABA’s plans for its busiest shopping day of the year, the 11-11 Singles Day, a celebration of being single that BABA turned into a national spending day akin to Cyber Monday. Wall Street expectations are for BABA sales to exceed last year’s single-day sales record of $14.3 billion.   

At Thomson Reuters, analysts polled are forecasting an average profit of $0.69 a share on topline sales of $5.04 billion. That equates to a roughly 20% increase in earnings and 40% higher in revenues over the year-ago period. In the eight quarters since BABA went public, it has outpaced Wall Street’s expectations seven times.

Short-term options traders have priced in a potential share price move just under 4% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform from TD Ameritrade.

On the call side, there has been activity at the 107-strike price, while puts have been active at the 100 strike. The implied volatility is at the 44th percentile; its historical volatility sits at the 5th percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time. 

BABA, 3m, Jun-Oct 2016

FIGURE 1: BABA BULLISH?

BABA shares are down more than 7% since hitting a two-year high in late September but have surged 36% since late June compared with the S&P 500’s (SPX) 7.5% gain over the same period. BABA share haves traded with an 80% correlation to SPX over the last year. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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