Alibaba (BABA) stock has been under consistent pressure since the start of the year, driven by a combination of factors. Aside from fears over the company’s corporate governance, there remains some concerns that the company’s rocky political standing in China can impede future growth.
Meanwhile, investors are struggling to reconcile whether Alibaba's attractive valuation is low enough to offset these various risks. The Chinese e-commerce giant will report fourth quarter fiscal 2021 earnings results before the opening bell Thursday. BABA shares, which have fallen from their peak of $319 per to around $225, continue to trade at a discount to their American FAANG peers. This is even though Alibaba has demonstrated the high-growth, high-profitability characteristics that are consistent with the likes of Amazon (AMZN) and Google (GOOG , GOOGL), which enjoy premium valuations.
Alibaba’s recent struggles began in late December when the company’s planned $34.4 billion initial public offering of its payments unit Ant Group’s was suspended, seemingly in retaliation after billionaire founder Jack Ma spoke critically about Chinese regulators. Listing authorities reportedly discovered an “array of shortcomings” with Alibaba’s listing qualifications and disclosure requirements. Alibaba is said to be working with authorities to comply with the various demands, including a requests to delink financial services from its core payment service.
What’s more, the company recently put to rest one major uncertainty related to the antitrust investigation against Alibaba which ended with a fine of $2.78 billion. But in the near term, investors still want to know what will it take to revive BABA shares. The company on Thursday must give investors a reason to believe the stock is not only worth the near-term risk, but also has significantly more long-term upside than expected.
In the three months that ended March, Wall Street expects the Hong Kong-based online retailer to earn earn $1.78 per share on revenue of $27.52 billion. This compares to the year-ago quarter when earnings came to $1.31 per share on revenue of $16.32 billion. For the full year, earnings are projected to rise 32% year over year to $10.20 per share, while full-year revenue of $110.24 billion would rise 40.3% year over year.
With the Chinese economy on a path towards revitalization, Alibaba profits will also continue its rapid growth, given that the company controls some two-thirds of China’s e-commerce market through Taobao and Tmall. The company’s exposure to the cloud and Big Data analytics will also help accelerate BABA’s rising customer base and thus, another top and bottom-line beat. BABA’s cloud unit, Aliyun, is growing almost three-times faster than some of its U.S.-based competitors.
What’s more, the surge in online spending trends, including online grocery penetration, remains strong with gross merchandise value in China expected to grow at close to 20% annually through 2025. In the most-recent quarter, not only did the company’s Core commerce sales soar 38%, annual active consumers on China retail marketplaces reached 779 million, up 22 million year over year. With Alibaba’s net income margins consistently above 20%, driven by its massive economies of scale, its profitability should remain in the upper echelon of tech stocks in the market.
All told, to dispel the various political and anti-trust concerns, on Thursday BABA must deliver top and bottom-line beat, upside guidance and positive commentary about growth prospects for fiscal 2022.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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