Alibaba Group Holding Ltd (BABA): Q2 Earnings; Crisp Day Ahead

27 Oct 2015 | Author: | No comments yet »

Alibaba Announces September Quarter Revenue of 22.2 Billion Yuan.

Alibaba Group Holding Ltd.’s second-quarter revenue beat analysts’ estimates as China’s biggest online shopping company boosted advertising to fend off a slowing economy. The initial euphoria surrounding Hangzhou-based Alibaba was so intense that within two months of the IPO, its market capitalization shot up to US$294 billion — more than what Facebook Inc. is valued at today.

Here’s what to watch for: EARNINGS FORECAST: Analysts surveyed by S&P Capital IQ expect Alibaba to earn 29 U.S. cents a share, or $762 million (4.8 billion yuan). Then the stock began its long descent, losing US$150 billion in market value by late September 2015, becoming the biggest destructor of shareholder wealth during the period.

That’s up 58% from a net profit of 3 billion yuan in the same period last year, when it was off 39% mostly because of share-based compensation to employees. New cloud-based services for merchants and partnerships with retailers including electronics chain Suning Commerce Group Co. are helping boost ads and limit the impact of a slowing Chinese economy. CONSUMPTION TRENDS – As China’s economic slowdown continues to deepen, investors will be keeping a close eye on the impact the slump is having on consumer confidence and spending. Increased promotions on Alibaba’s Tmall.com and Taobao Marketplace are driving sales ahead of next month’s Singles’ Day, the country’s biggest shopping event. “Alibaba is tweaking its payments for search terms, which helped generate more money from advertisers,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services LLP. “Investors are expecting things to improve at Alibaba as the economy in China improves with more stimulus policies.” Shares of Alibaba closed Monday at $76.35 in New York. With more than 82 per cent of its revenue coming from China, Alibaba is highly sensitive to the country’s economy, which is headed for its slowest pace of growth in a quarter-century.

For Alibaba, the key metric to watch is the rate of growth of total e-commerce transactions on its platforms, known as gross merchandise value, or GMV. Alibaba’s investor-relations chief Jane Penner said in September that Alibaba believes its GMV for the quarter would be “mid-single-digits lower than our initial expectations,” though the company doesn’t disclose its own estimates. The company this month offered $4.6 billion for the rest of Youku Tudou Inc. to stream more video content to Chinese Internet users through control of the YouTube-like site. When billionaire Jack Ma stepped down as chief executive officer of Alibaba in 2013, he said he wanted to focus more on the environment and philanthropy. Alibaba’s Executive Chairman Jack Ma has sought to reassure shareholders of the prospects of the company’s growth despite the slowing economy and said he has confidence in Chinese consumers.

TAKE RATE – Another important metric for this e-commerce company is the “take rate” – the measure of the revenue the company earns relative to the overall value of merchandise sold on its online platforms. That includes investing in Didi Kuaidi, China’s biggest taxi-hailing application, and backing the merger of group buying platforms Meituan.com and Dianping.com.

The former English teacher is still the face of the company — he accompanied President Xi Jinping to the U.S. and U.K. recently – – and writes the letters addressed to shareholders in Alibaba’s financial reports. In earlier quarters, this rate has been falling year-on-year as the share of transactions on mobile devices, less lucrative for Alibaba than those on desktop computers, has risen. The company has been trying to push beyond e-commerce, acquiring stakes in football teams, movie studios and healthcare companies — US$14.8 billion of transactions have been announced this year, according to data compiled by Bloomberg. That said, Alibaba makes money mostly from advertising and commissions from merchants on its marketplaces, and some analysts expect it to report an improved take rate this quarter from new advertising slots and more merchants spending their advertising budget on mobile ads. The idea is for Alibaba to evolve beyond e-commerce and muscle into areas such as movies and sports, payment systems, operating systems and cloud computing.

Buying Youku is part of Alibaba’s plans to reach more of the 594 million Chinese who access the Internet from mobile devices and are hungry for online content. Alibaba has said the deal would help the company spread out costs for content with its new film-production arm and to drum up new sales, but some analysts have said such spending would likely put pressure on the company’s margins. Speaking of investors, Ma wasn’t kidding when he told prospective shareholders in 2014 that employees and customers were more important than Wall Street. While mobile platforms help capture the millions of consumers shopping on smartphones and tablet computers, the smaller screens typically generate less advertising revenue. Alibaba also faces renewed pressure about selling counterfeits on its websites, with the American Apparel and Footwear Association requesting that Taobao Marketplace be put back on a U.S. government “Notorious Market” list that shames intellectual property rights violators.

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