* Reports Wednesday, May 15, before the opening
* Revenue expectation: $ 13.47B, EPS: $ 0.99
The Chinese e-commerce giant, Alibaba (NYSE :), has a lot at stake when it reports Wednesday. Equities have risen by around 30% since the January lows, optimistic that the Chinese consumer economy remains strong enough to support expansion in the company's sales.
But that optimistic scenario is increasingly threatened by China's escalating trade war with the US and the growing competition in China from other e-commerce operators. US President Donald Trump raised rates on $ 200 billion Chinese goods to 25% from 10% on Friday and threatened to add more products as trade negotiations between the two global powers came to a halt. The stock reacted sharply to the news last week and fell by 8.8% during the last five sessions and closed on Friday at $ 178.
If the two largest economies in the world do not resolve their dispute and start a full-fledged trade war, Alibaba's sales projections for the next fiscal year may weaken, obscuring the prospects for its shares. The slowdown in China is likely to affect the sale of durable consumer goods, and Alibaba has already seen slower growth in consumer electronics, especially mobile phones, vice-president Joe Tsai told analysts in January
Alibaba is also facing strong competition from Chinese online retailers, including Jd.Com (NASDAQ 🙂 and Pinduoduo (NASDAQ :). Alibaba, with a market capitalization of $ 461 billion, recorded a sales increase of 27% of its core retail activity in the quarter through December, compared to the same period in the previous year. That was the slowest expansion in three years, when the unit consisting of the Taobao and the Tmall e-commerce platforms came under pressure
Despite challenges Alibaba is a safer bet on China
Despite this challenging environment for Chinese consumer companies, we see Alibaba as a much safer bet than smaller players who still have to show a sustainable path to growth. For that reason we love Alibaba, the Chinese equivalent of Amazon.com (NASDAQ :), more than any other technology range.
The company continues to show strong growth in its user base and quickly generates revenue from new advertising revenue streams. Sales from Alibaba's core trading platform increased by 40% in the third quarter compared to the same period a year ago. The cloud computing segment generated sales that were 84% higher, and its innovation initiatives increased by 73% over this period, which was an indication of the success of the company's efforts to diversify its activities
In the future, Alibaba has a much better chance of growing and diversifying. The company has invested heavily in expanding cloud computing activities by opening new data centers in Europe, the Middle East, South Asia, Southeast Asia and the domestic Chinese market
China's latest economic measures to boost domestic growth is another reason that makes us more optimistic about Alibaba. China plans to increase spending by 2 trillion ($ 291.4b), or 2% of the $ 13 trillion economy and give 30% more loans to small businesses. This is a good omen for store shares and Alibaba is well positioned to benefit if these measures stimulate consumer spending.
Bottom Line
The ongoing trade-related uncertainties and the risks to China's economic growth mean that this is probably not the best time to assume exposure to Chinese equities. And for the same reasons, we don't see Alibaba producing an optimistic forecast for its next fiscal year when it reports Wednesday.
However, the majority of Wall Street analysts have a buy rating on Alibaba, with an average target price of $ 207.57. So, if your investment horizon is in the long run, buying Alibaba shares at a potential dip is a good idea, given the company's dominant market position and ability to take advantage of Chinese growth acceleration plans.
