Alibaba's (BABA 2.18%) earnings will be a slight disappointment on the revenue front this quarter.
The Chinese e-commerce giant has made a habit of crushing revenue estimates. In fact, last quarter it hit a major milestone: its 10th straight quarter of over 50% revenue growth. That's impressive, especially for a company that's been around for nearly 20 years.
However, the economic slowdown in China may put an end to the streak. Last quarter, the company helped prepare investors for its lower-than-expected revenue by revising its full-year revenue guidance downward. For the third-quarter report, due out Jan. 30, investors should be managing their expectations.
Alibaba's earnings are taking a hit after the slowdown in the China economy. Image source: Alibaba.
Alibaba's recent revenue growth history
Alibaba's revenue growth has been on fire the past two and a half years. But for the third quarter, Alibaba is expected to report revenue growth of 38.3% year over year to $17.7 billion. That represents a significant deceleration from the year-ago period, when it reported revenue growth of 56%. Revenue growth under 50% would be a significant outlier for the company.
| Quarter | Revenue Growth (YOY) |
|---|---|
| 2017 Q1 | 59% |
| 2017 Q2 | 55% |
| 2017 Q3 | 54% |
| 2017 Q4 | 60% |
| 2018 Q1 | 56% |
| 2018 Q2 | 61% |
| 2018 Q3 | 56% |
| 2018 Q4 | 61% |
| 2019 Q1 | 61% |
| 2019 Q2 | 54% |
Fiscal years shown. Data source: Alibaba. YOY = year over year.
But even though the company reported 54% revenue growth last quarter, its $12.4 billion revenue still came in below what analysts were expecting. That was the first sign the company was experiencing some headwinds.
But while 38% revenue growth is a significant drop from the 50%-plus growth that's become the norm for Alibaba, it's still impressive. In other words, because Alibaba's revenue growth has been so consistently high, a bad revenue growth quarter for the company is still a good one compared to most.
Why this quarter is an outlier
Investors should have known this quarter would be an outlier.
Last quarter, Alibaba lowered its revenue guidance by 4% to 6% in yuan terms for the fiscal year that ends March 30. The company said its revenue was being negatively affected by the current macroeconomic conditions in China, including the trade war with the United States, and the fact that the Chinese economy grew last quarter at its slowest pace since 2009.
These economic woes also explain why Alibaba's shares dropped down to nearly $130 at the end of December and beginning of January. However, the stock has recovered some in the New Year, climbing nearly 16% year to date to about $158 as of this writing.
These are issues that won't be fixed overnight. Even Alibaba's annual Singles Day sales extravaganza on Nov. 11 showed its slowest year-over-year growth rate in the 10 years the company has been promoting the event.
But investors should be patient. Earlier this month, Alibaba President Michael Evans spoke at the National Retail Federation's annual conference, where he focused on the slowing Chinese economy. He pointed out that a $13 trillion economy can't grow between 7% and 8% forever. But he continues to believe that China will become the largest economy in the world over the next decade. "The future, I think, looks very good, notwithstanding some troubling headwinds," Evans said.
Check out the latest Alibaba earnings call transcript.
