Key Takeaways

  • Alibaba reported an adjusted net income over $3.1 billion versus the $2.4 billion analysts expected.
  • Revenue and annual active customers exceeded expectations.
  • The bad news is that there is a bill in congress that may de-list Alibaba's stock.

What Happened

It reported higher-than-expected numbers for earnings, revenue, and annual active customers, good news across the board for its financials. Alibaba's gross merchandise volume broke $1 trillion as more merchants came online to use its digital sales platforms in the face of the coronavirus lockdown. Alibaba's cloud business, while still significantly smaller than its rival, Amazon, grew its revenue 58% YOY. The trend towards online shopping in our post-COVID-19 world is likely to provide Alibaba tailwinds.

All of this has been overshadowed by the passage of bill through by the U.S. Senate earlier this week that could lead to Alibaba, as well as many other Chinese companies, being de-listed from U.S. stock exchanges. The bill was passed in the wake of a scandal in which Nasdaq-listed Chinese firm Luckin Coffee, turned out to have been fabricating its sales numbers. The bill, if passed, would require all publicly-traded foreign companies to follow U.S. standards for audits and financial regulation, as well as reveal if they are owned or controlled by a foreign government. Alibaba's stock is down 5.9% over the past 24 hours as the bill looks like it will be taken up by the House of Representatives next week.

(Below is Investopedia's original earnings preview, published May 19, 2020)

What To Look For

Alibaba Group Holdings Ltd. (BABA), the giant online retail platform often called the of China, is bracing for the financial fallout from the worst global economic crisis in recent history. The coronavirus pandemic has caused a major downturn in Alibaba's key consumer markets, including China. Investors will focus on how these forces are affecting growth of Alibaba's annual active consumers, a key metric, when the company reports earnings on May 22, 2020 for Q4 2020 fiscal year (FY). The company's fiscal year ended March 31, 2020. Analysts estimate that the company's adjusted net income will plunge amid slower growth in both revenue and annual active consumers.

Despite crashing on fears of the spread of COVID-19, Alibaba's stock has rebounded and is currently outperforming the broader market. The company's shares have provided investors with a total return of 34.0% compared to the S&P 500's total return of 4.0% over the past 12 months. For this story, key Alibaba financial data have been converted from Renminbi to U.S. Dollars using a CNY/USD exchange rate of 0.140649 as of May 18, 2020.

One Year Total Return for S&P 500 and Alibaba
Source: TradingView.

In the most recent reported quarter, Alibaba posted adjusted net income growth of 51.9% for Q3 FY 2020 compared to the same quarter a year ago. It was the company's second highest year-over-year (YOY) rate of growth in nine quarters. However, revenue rose just 37.7%, continuing a decelerating trend that began two quarters earlier and which marked the lowest YOY revenue growth in at least 15 quarters. Alibaba's shares fell slightly following the report before crashing on fears over the spread of the coronavirus.

While the stock has rebounded, analysts expect one of the company's worst quarters in years. Adjusted net income is forecast to fall 23.2% YOY, marking the first decline in at least 16 quarters. Revenue growth is expected to slow to 14.3% YOY, well under half the growth rate posted in Q3 FY 2020. Barring some quick V-shaped recovery in the global economy, the company's shares are likely to be under pressure for much of the rest of the year.

Alibaba Key Metrics
  Estimate for Q4 2020 (FY) Actual for Q4 2019 (FY) Actual for Q4 2018 (FY)
Adjusted Net Income ($B) 2.4 3.2 2.1
Revenue ($B) 15.0 13.2 8.7
Annual Active Consumers (M) 723.4 654.0 552.0

Source: Visible Alpha

As mentioned above, investors also will focus on Alibaba's annual active consumers. This key metric refers to the number of user accounts with one or more confirmed orders on Alibaba online platforms during the previous 12 months, regardless of whether or not the transaction was settled. Retaining and attracting active consumers is important to Alibaba's business model, which in large part consists of selling marketing services to the merchants that sell their wares on the company's online platforms. The more active consumers Alibaba attracts, the more the company is able to generate advertising revenue from those merchants.

Alibaba reported a total of 711 million annual active users for Q3 FY 2020, marking a rise of 11.8% compared to the same quarter a year earlier. It was the slowest rate of growth the company had posted since Q2 FY 2018 and was a continuation of the deceleration trend that had begun in Q4 FY 2019. That deceleration trend is expected to continue with analysts forecasting a rise of 10.6% to 723.4 million annual active consumers for Q4 FY 2020. Q4 covers only part of the period when the pandemic began to hurt global economies. Alibaba faces a daunting challenge in growing the ranks of its active consumers in the coming year amid job losses and falling incomes in China and other markets.