Earnings season has quieted to a whimper these days, but that will only draw more attention to Alibaba (BABA 1.36%) later this week. China's leading online marketplace operator reports financial results on Thursday morning, and Wall Street is holding out for another strong showing.
Alibaba has been a machine, cranking out healthy yet consistent growth. Year-over-year revenue gains have clocked in between 54% and 61% for eight consecutive quarters. Analysts see revenue climbing 61.4% to $11.76 billion in this week's fiscal first-quarter results, slightly stretching the high end of Alibaba's tight growth range over the past two years. If Alibaba grows its top line by anything north of 61%, it will be its strongest revenue growth in more than four years.
Alibaba CEO Jack Ma. Image source: Alibaba.
There's a market and a place for a marketplace
Accelerating growth isn't common for companies as large as Alibaba, a juggernaut with 552 million annual active customers. Things aren't as scintillating at the other end of the income statement. Wall Street is holding out for a profit of $1.21 a share in Thursday's report, a modest step up from the $1.15 it delivered a year earlier. This should be the third quarter in a row that earnings growth fails to keep up with revenue gains.
Margins have contracted at Alibaba as it invests in new growth opportunities, including cloud computing, enhanced logistics, and new retail categories. The silver lining here is that Alibaba has landed ahead -- and sometimes comfortably ahead -- of analyst profit targets over the past year.
| Quarter | EPS estimate | EPS actual | Surprise |
| Q1 2018 | $0.90 | $1.15 | 28% |
| Q2 2018 | $0.99 | $1.24 | 25% |
| Q3 2018 | $1.53 | $1.54 | 1% |
| Q4 2018 | $0.79 | $0.83 | 5% |
Date source: Yahoo! Finance.
Alibaba was one of last year's big dot-com winners, soaring 96% in 2017. It's been a different story this year. The stock is essentially where it was when the year began. It's not necessarily Alibaba's fault, beyond the thinning margins, though the pace of the earnings beats has slowed lately.
Chinese internet stocks have generally fallen out of favor this summer. Regulators cracking down on social media, streaming video, and online gaming have weighed on China's largest publicly traded internet stocks. Alibaba is trading 17% below the all-time highs it set two months ago, but among the five most valuable Chinese internet stocks, that's actually the tamest correction.
Alibaba isn't immune to the content crackdown in China; it does own a controlling stake in a movie studio. And naturally, investors hesitant to buy into some Chinese growth stocks may find it easier to avoid all of them. However, with core commerce accounting for 86% of the revenue mix here (digital media has a mere 8% slice of the pie), it's also easy to see why Alibaba has held up better than its entertainment-centric peers. Alibaba remains a play on internet-fueled commerce in China, and regulatory agencies don't want progress on that front to go away.
It will be easy for Alibaba to stand out on Thursday, as just a handful of other companies will be stepping up with fresh financials. If the online speedster lives up to growth expectations, delivers another earnings beat, and offers up hope that margins will start widening again in the near future, it's going to be a good week for Alibaba to stand out.
