Key Takeaways

  • Adjusted EPS was 14.82 yuan per ADS vs 13.28 yuan analysts expected
  • Sales growth beat expectations
  • Growth in annual active customers failed to match expectations

What Happened

Alibaba beat both earnings and revenue expectations for its June quarter. As the Chinese economy recovers from the COVID-19 pandemic with the spread of the coronavirus largely under control, Alibaba's Chief Financial Officer, Maggie Wu said "Our domestic core commerce business has fully recovered to pre-COVID-19 levels across the board". The only area of disappointment was that the number of annual active customers in the Chinese retail market didn't grow as much as analysts had predicted. Alibaba is also expanding into cloud computing, a very high margin business where it will compete with Amazon and Microsoft, among others. Alibaba's cloud segment grew 59% year over year, even faster than its overall revenue growth of 34%.

(Below is Investopedia's original earnings preview, published August 13, 2020)

What to Look For

Alibaba Group Holdings Ltd. (BABA), the giant online retail company often referred to as the Amazon.com of China, has dramatically outperformed the broader market in 2020 amid the COVID-19 pandemic and the worst economic crisis in decades. Alibaba's outlook has brightened as the spread of the coronavirus has slowed sharply in China, the company's biggest market by far.

Investors will be looking to see if Alibaba's growth has rebounded when the company reports earnings on August 20, 2020, for Q1 FY 2021. The company's 2020 fiscal year (FY) ended March 31, 2020. Analysts expect year-over-year (YOY) growth in adjusted earnings per share (EPS) and revenue to slow dramatically compared to the same quarter a year earlier. But the good news may be that analysts estimate revenue growth will accelerate significantly compared to the previous quarter. Note, all mentions of EPS refer not to Alibaba's shares listed in Hong Kong with the ticker 9988, but to its american depository shares (ADS) with the ticker BABA.

Investors will also be focused on Alibaba's annual active consumers, a key metric indicating the number of people making purchases on its platform. Analysts expect YOY growth in annual active consumers to be slightly lower than the previous two quarters, but dramatically slower than the same period a year ago.

Shares of Alibaba have outperformed the broader U.S. stock market over the past year. While the stock was not immune to the coronavirus-induced market crash that began in late February, it has since rebounded and reached new highs. Alibaba's stock has provided investors with a total return of 60.2% over the past 12 months compared to the S&P 500's total return of 17.3%.

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

Alibaba's shares initially slumped after reporting earnings that beat estimates for Q4 FY 2020, which ended March 31, 2020. It was during the fourth quarter that the coronavirus first began to spread rapidly. Adjusted EPS grew 7.4%, a dramatic slowdown from the previous four quarters where YOY growth ranged between 36-56%, and the slowest pace since Q1 FY 2019. Revenue grew 22.3%, the slowest pace in at least 16 quarters and the fourth consecutive quarter of decelerating YOY growth. But the stock quickly resumed its upward momentum the following week.

It was a stark contrast to Alibaba's Q3 FY 2020, a quarter not yet affected by COVID-19. Adjusted EPS grew at a robust pace of 49.0%. Revenue growth, at 37.7%, also was strong. However, this continued a deceleration trend that began in Q4 FY 2019. Regardless, mounting fears over the spread of the virus caused the company's stock to crash along with the rest of the market in late February.

Analysts' are forecasting a pickup in growth for Q1 FY 2020, now that the worst of the pandemic in China may be over. They estimate that adjusted EPS will grow 5.6% for the quarter, which ended June 30, 2020. That would mark the slowest pace of growth since Q1 FY 2019. Revenue is expected to grow 28.6% to 147.8 billion yuan ($21.3 billion), a definite improvement from last quarter's growth rate, but still the second slowest pace recorded in the past several years.

Alibaba Key Metrics
  Estimate for Q1 2021 (FY) Actual for Q1 2020 (FY) Actual for Q1 2019 (FY)
Adjusted Earnings Per ADS 13.60 yuan 12.55 yuan 8.04 yuan
Revenue 147.8 billion yuan 114.9 billion yuan 80.9 billion yuan
Annual Active Consumers 745.6 million 674.0 million 576.0 million

Source: Visible Alpha

As mentioned, many investors also will focus closely 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 726 million annual active consumers for Q4 FY 2020, marking a rise of 11.0% compared to the same quarter a year earlier. It was the slowest rate of growth the company had posted since Q1 FY 2018 and was a continuation of the deceleration trend that had begun in Q4 FY 2019. Still, it beat analysts' expectations and was only moderately lower than the 11.8% increase posted in the previous quarter. Alibaba engineered this growth even though it was the first quarter that Alibaba was affected by COVID-19. That trend of moderate growth is expected to continue in Q1 FY 2021. Analysts estimate that annual active consumers will rise 10.6% to 745.6 million.

Another challenge potentially facing Alibaba's investors could be the delisting of the company's stock from U.S. exchanges. The Trump administration earlier this month proposed a plan that would force Chinese companies listed on U.S. exchanges to comply with U.S. financial audit requirements. The proposal follows bipartisan legislation that passed the U.S. Senate in May, which would give non-compliant Chinese companies three years to delist in the U.S. Alibaba's shares trade on several global stock exchanges, including the New York Stock Exchange (NYSE).