Alibaba surges ahead of earnings

Alibaba has shaken off the post-IPO weakness to see a move higher in its share price, on optimism that earnings next week will justify the somewhat high valuation.

Jack Ma
Source: Bloomberg

Quarterly earnings from Alibaba for the three months to 30 September are expected on 4 November. The company is expected to report earnings of $2.79 per share on sales of $15.87 billion, with earnings falling 2.55% from a year ago and sales rising 3% in the same period.

At first the doubters seemed correct. After an initial pop in the share price Alibaba lost momentum, seeing its share price move below the IPO price of $68. This confirmed the fears of many that the IPO market was saturated and that investor appetite was waning.

However, as we head towards Alibaba’s first set of quarterly figures as a US-listed firm, optimism is increasing with the shares rising over 17% during the second half of October.

Forecasts suggest that Alibaba will see good top-line growth, with revenue growth pushing above the 50% level. This is being driven primarily by the increased number of active users, which may surpass 300 million for the quarter in question.

Fresh offerings on the platform and increased wealth among Chinese consumers should see a rise in activity levels as well, but as a consequence of increased ad spending Alibaba is likely to see margins at both the gross and operating levels drop back. Even so, at the projected 72% and 42% for gross and operating margins respectively, Alibaba is still enjoying good profit generation.

As we look ahead, the picture is naturally less easy to predict. Revenues are unlikely to maintain the 50% growth forecast for the current quarter, as the company increases in size. However, with growth comes the advantage of economies of scale, allowing for cuts in costs that should see a steady rise in margins.

The suggestion of a potential partnership with Apple is one area that investors should look out for. As it builds its presence in the US, Alibaba will need to work on relationships with such big names to get its brand into new marketplaces. The positive reaction to Jack Ma’s comments regarding Apple is a sign that the market approves of such developments.

With earnings growth forecast to be around 21% per annum over the next five years, at current valuations Alibaba still has its work cut out. It must sustain growth of that rate to avoid disappointment among investors. The worry will be that Alibaba is priced for perfection, with no margin for error. The outlook looks encouraging at present, but the risks of failure are still great.

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