Alibaba share price tumbled 11% towards two-year-low after big earning miss

China’s top tech giant Alibaba experienced one of its worst days in US share market. Its share price (NYSE: BABA) dropped harshly by 11% from $161, the day before, to $143 when market closed on Thursday.

Even through a 4.07% drop before the report day showing Alibaba Group Holding Ltd (All Sessions) investors had little expectation for the Chinese ecommerce giant given all the bumpy hurdles that it had gone through, the disappointing Q2 earnings still dragged the BABA’s share price down much further.

What does the Q2 earnings show?

Based on Alibaba’s Q2 earnings, the ecommerce giant reported non-GAAP earnings per share (EPS) of $1.74, missing the estimate of $1.93, representing a shocking 37.7% decline compared to the same period last year. Revenue was also reported as a miss, totalling $31.15 billion as opposed to the estimated $32.05 billion.

Annual active consumer globally is the only beat that has reached approximately 1.24 billion, more than four-times the size of Amazon (300 million), with a quarterly net increase of 62 million consumers.

Alibaba earnings results

Metric

Beat/miss/match

Reported value

Analysts prediction

Adjusted EPS Miss RMB 11.20 RMB 12.11
Revenue Miss RMB 200.7B RMB 205.7B
Annual active consumers in China Beat 953 M 846.6 M

Source: VisibleAlpha

Quarterly earnings surprise amoune

Fiscal quarter end

Date reported

Earnings per share

Consensus EPS forecast

% Surprise

September 2021

18/11/2021

1.75

1.93

-9.3

June 2021

8/03/2021

2.16

1.74

24.1

March 2021

05/13/2021

1.1

1.41

-22.0

December 2020

2/02/2021

2.98

2.78

7.2

September 2020

11/05/2020

1.32

1.65

-20.0

Source: Nasdaq.com

Why is the market disappointing?

Fundamentally, investors are concerned about the company’s long-term profitability. Although the group’s revenue still grew by 29% year-over-year, its adjusted EBITA margin for the most profitable sector ‘commerce’ decreased from 35% in the quarter ending 30 September 2020 to 19% a year after, shrinking by a worrying 45%. Alibaba didn’t deny thinner margin in the report, stating “we expect that our commerce adjusted EBITA margin will continue to be affected by the pace of our investment in key strategic areas”.

Actually, Alibaba's operating margin has been declining for some time. In 2014, the company’s margin sat at around 45% when their active user size was only one-fourth of what it is today. This means the ecommerce giant’s margin has been reducing by an average of 12% every year.

Adjusted EBITA and adjusted EBITA margin by segments (in millions, except percentages)

2020

2021

RMB

Margin

RMB

US$

Margin

Commerce

45,958

35%

33,270

5,163

19%

Cloud computing(1)

-567

-4%

396

61

2%

Digital media and entertainment

-710

-9%

-931

-144

-12%

Innovation initiatives and others(1)

-1,970

-189%

-2,882

-447

-201%

Source: Alibaba

On the other hand, Alibaba’s challenge is not just a matter of fundamental valuation, but a matter of risks. As the open window into the impact of Beijing’s regulatory curbs, Alibaba coincided other Chinese stocks listed in the U.S. are reporting similar troubling results this quarter. For example, Tencent last week reported its slowest revenue growth since 2004, fuelled with the growing concern over the company’s long-term picture under the environment that was walloped by macroeconomic and regulatory turmoil.

Alibaba technical analysis

Over the past twelve months, Alibaba's shares have provided a total return of -37.1%, well below the US 500's total return of 29.9%.

From a technical standpoint, the freefall from this week has left a big gap between $146 to $160, which became the critical resistance level if the price is seeking higher in the near term. The candlestick is now sitting in the previous gap from October, with the support level at $139. If the bearish momentum stays, a further down to two-year-low at $130 may be in view.

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