Earnings Outlook: Alibaba earnings: Spending for a future beyond e-commerce

Alibaba Group Holding Ltd. dominates online shopping in China, but the company has bigger plans in mind.

The Chinese e-commerce giant is investing aggressively as it tries to profit from more aspects of the retail experience, including food delivery and physical stores. These are part of Alibaba’s BABA, +0.46%  “new retail” initiatives, which are meant to merge online and offline commerce.

“We think Alibaba is years ahead of any competitor in driving digital commerce forward,” MKM Partners analyst Rob Sanderson, who rates the stock a buy with a $280 target price, wrote earlier this summer. “Of greater consequence is Alibaba’s foray into digitizing offline commerce (new retail), which we think is even further ahead and has potential to multiply Alibaba’s addressable market.”

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Alibaba’s investments have weighed on recent results, and the question is whether investors will show patience going forward as the company plays the long game. The company is due to report results Thursday before the market opens, and management will likely provide some commentary on investment spending and progress.

If last quarter’s results and subsequent stock performance are any indication, Wall Street seems willing to settle for less on the profit front in the near term if it means bigger opportunities a few years out. Stifel’s Scott Devitt commented after Alibaba’s March-quarter earnings that the company’s margins disappointed due to investment spending, but Alibaba shares gained following the report.

“We remain comfortable with the lower long-term margin profile as it will allow the company to generate a higher level of absolute profit over the long term and should lead to increased efficiencies across Alibaba’s entire ecosystem,” Devitt wrote. He rates the stock a buy with a $256 price target.

When the earnings report hits, look for information about Alibaba’s recently announced partnership with Starbucks Inc. SBUX, +0.98%  that is meant to bolster its Hema supermarkets as well as the consolidation of Ele.me, a food-delivery startup that the company recently acquired. Consolidation ended up happening later than analysts were expecting.

Here’s what else to watch out for when Alibaba reports fiscal first-quarter results.

What to expect

Earnings: Analysts surveyed by FactSet expect that Alibaba earned $1.21 per share in the June-ended quarter, up from $1.17 in the year-earlier period. According to Estimize, which crowdsources projections from hedge funds, academics, and others, the average estimate calls for $1.39.

Revenue: The FactSet consensus calls for revenue of $11.8 billion for the June quarter, compared with $7.4 billion a year ago. Estimize projects $12.6 billion in revenue.

Stock movement: Alibaba shares have gained following six of the company’s last 10 earnings reports. They are down 13% over the past three months, compared with a 4% rise for the S&P 500 index SPX, +0.33%  .

Analysts are uniformly upbeat about Alibaba. Of the 39 analysts tracked by FactSet who cover the stock, all 39 rate it a buy. The average price target is $234.62, 36% above current levels.

What else to watch for

Tariff concerns have pressured Alibaba shares in recent months, and analysts will likely use Alibaba’s earnings call to ask executives about the impact of trade tensions’ impact on the company’s performance and overall e-commerce spending in China.

Stifel’s Devitt recently highlighted lower-than-expected retail sales data in China for July, which was released by the government on Aug. 14. July spending numbers won’t impact results for the to-be-reported quarter, which ended in June, but the trend will certainly be top of mind.

“Despite the Chinese government’s efforts to boost lending over the past month, it appears U.S. tariffs are having a larger impact on the retail landscape than we had previously anticipated,” Devitt wrote. He’s upbeat about Alibaba and peer JD.com in over the long term but warns of “near-term volatility as trade-related headwinds and negative sentiment persist.”

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Alibaba’s cloud business is another important issue for investors and analysts, and the company has made some recent moves in this space. Autonomic Partners, a company owned by Ford Motor Co. F, +0.42%  , recently announced a partnership with Alibaba Cloud that centers on connected cars. Executives might be pressed to discuss this further during Alibaba’s earnings call.

Also of interest will be any discussion of the improvements Alibaba is making to its cloud infrastructure and expected benefits.

“While AliCloud will probably remain in investment mode near-term, we believe accelerating revenue per customer trends suggest a migration to value-added content delivery and database services that can drive segment adjusted margins improvement over time,” wrote Morningstar’s R.J. Hottovy, who calls Alibaba’s stock undervalued.

See also: Microsoft chipped away at Amazon cloud dominance in 2017, says Gartner

Another theme to watch out for is the World Cup, which Jefferies analyst Karen Chan warned could have had a meaningful impact on Alibaba’s content spending during the quarter and might have hit earnings. She rates the stock a buy with a $242 price target.

Susquehanna Financial Group’s Shyam Patil, however, sees the company’s World Cup partnership as a potential tailwind for the quarter. He listed the World Cup as one reason why Alibaba could deliver revenue upside, along with commission outperformance and traction in “new retail.”

Patil will also be looking for commentary on Alibaba’s Cainiao logistics efforts and international expansion. He has a positive rating and $305 price target on shares.

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