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Alibaba descends ahead of earnings

Third-quarter earnings from Alibaba promise to be a key moment for the stock, which has been steadily slipping since hitting a post-IPO high around $120 per share last November. 

Alibaba CEO, Jack Ma
Source: Bloomberg

Alibaba shares need something good to arrest the slide in their price, which has seen the stock drop by almost 14% since its mid-November peak.

Fortunately, fiscal Q3 earnings might provide that good news. Gross merchandise value (GMV), a key metric for Alibaba, and essentially a sales benchmark, is forecast to be strong for the period in question thanks to a good performance over the Singles Day holiday in China. Combined with increasing market share in China, this bodes well overall for earnings.

Competition for market share is strong in Alibaba’s home market, but in recent quarters the company has managed to maintain an edge over rivals. Not only this, but the firm has succeeded in keeping margins at a very healthy level, at 54.4% for profit margins and 48.1% for earnings margins.

Alibaba chart

Like Facebook, Alibaba must improve its rate of mobile monetisation, i.e. the amount earned from use of its mobile app as opposed to its PC platform. Mobile spending accounted for 35% of GMV in the previous quarter, but the company says this rose to 42.6% during the Singles Day holiday. Alibaba needs to show both GMV increase and mobile monetisation increase to appease analysts.

Remarkably, on a PE of 44, Alibaba trades at a much lower premium than rivals like Amazon or Tencent, which are on barely believable figures of 723 and 341 respectively. Given the hype that surrounded the launch, it almost begins to look like a normal company.

The price has been stuck in a descending channel since November, as it continues to retreat from overbought levels seen at the peak, around $120. Recent price activity has seen the stock bounce from the bottom end of the channel before hitting the top, around $105, and then beginning to retreat. We will need to see a solid close above $105 to ensure that any breakout from the channel is not simply a temporary state of affairs.   

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