The big keep getting bigger. Alibaba (BABA -2.77%) shareholders had a huge 2017, as China's leading online marketplace operator's stock nearly doubled. The shares keep moving higher so far in 2018, hitting yet another all-time high on Monday.
The first big test of the year awaits on Thursday when Alibaba reports fiscal third-quarter results. Momentum and growth may be in Alibaba's corner, but a stock that soared 96% last year isn't guaranteed to continue being a market darling. In fact, 2017 was an outlier, as Alibaba entered 2017 essentially where it was shortly after going public in the summer of 2014. Let's go over a few things that could nip the stock's 13-month rally short later this week.
1. Analysts are getting too confident
At least three Wall Street pros jacked up their Alibaba price targets on Monday, fueling the run to a fresh all-time high. Stifel, SunTrust, and Morgan Stanely increased their goals for the stock by $20 to $30, planting them at $230, $240, and $250, respectively.
It's naturally a good sign to see so many analysts growing more upbeat just days ahead of a critical financial report. They wouldn't be going out on a limb if they weren't confident of a favorable market reaction to the numbers on Thursday. However, we also know that analysts don't always get it right. There's a little too much bullishness when it comes to Alibaba right now, and that's something that can backfire if it's anything short of a blowout performance.
2. Guidance could be problematic
The three-month period ending in December should be rocking. Alibaba posted record sales during its annual Singles Day shopping holiday in November, and Wall Street's modeling record financial results for the fiscal third quarter.
The current quarter will be different. There has historically been a sharp sequential drop between Alibaba's fiscal third and fourth quarters, and there's no reason to expect things to play out differently this time around. One can rightfully argue that the market knows this, and that growth for seasonal businesses is measured on a year-over-year basis. Analysts see a 27% sequential slide in revenue for the new quarter, but it's still nearly 50% ahead of where it was a year earlier. The problem here is if shoppers overspent during the fiscal third quarter or if market optimism is getting ahead of reality.
3. Earnings growth can hit some hiccups
It's not just the top-line guidance that could prove thorny. The analysts sprucing up their price targets on Monday have big expectations. Scott Devitt at Stifel feels that Alibaba will discuss its globalization efforts, new retail initiatives, and upgrades in logistics. These big dreams don't come cheap, and Youssef Squali at SunTrust recognizes that the increased retail investments and international expansion could weigh on the bottom line.
Analysts already see earnings per share growing slower than revenue in fiscal 2018 and again in fiscal 2019. If the investments don't pay off sooner rather than later, the margin contraction could be worse than what Wall Street's modeling. Alibaba is coming off back-to-back quarters of double-digit percentage beats on the bottom line, but it did fall short in the report before that. Alibaba can be mortal, and we'll find out where it lands on Thursday morning.