Key Takeaways

  • Adjusted earnings per ADS was 17.97 yuan vs. the 14.33 yuan analysts expected.
  • Revenue fell short of analyst expectations.
  • Annual active consumers was in-line with what analysts estimated.
  • Cloud computing revenue grew 60% YOY.

What Happened

Alibaba reported adjusted earnings per ADS that beat analysts' expectations for Q2 FY 2021. Revenue was slightly lower than forecast and annual active consumers, which continued to expand, was in-line with expectations. YOY growth in adjusted earnings per ADS sharply accelerated from the first quarter of the year while YOY revenue growth marked a slight deceleration compared to Q1. The company noted that revenue growth from its cloud computing business was especially strong.

(Below is Investopedia's original earnings preview, published November 3, 2020.)

What to Look For

Alibaba Group Holding Ltd. (BABA), like many other big tech firms, is enjoying the boom in online activity triggered by the COVID-19 pandemic. China's e-commerce giant posted rising earnings, revenue, and user activity in the latest reported quarter even as the global economy faltered amid the pandemic.

Investors will be watching to see if Alibaba can maintain that growth when it reports earnings on November 5, 2020 for Q2 FY 2021. The company's fiscal year ended in March. Analysts expect adjusted earnings per American Depositary Share (ADS) and revenue to rise year over year (YOY), with revenue posting robust gains.

Investors will also focus on Alibaba's annual active consumers in China, also called "active buyers." This key metric is used to gauge the number of users making purchases on its platform. Analysts expect a rise in annual active consumers, but at a slower pace than in recent quarters.

Shares of Alibaba have dramatically outperformed the broader market throughout the past year. Following the pandemic-induced market crash that began around mid-February and bottomed during the latter half of March, the stock has posted major gains and widened its performance gap with the rest of the market. Shares of Alibaba have provided a total return of 73.0% over the past 12 months, well above the S&P 500's total return of 7.5%.

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

The stock posted strong gains in the week after Alibaba's Q1 FY 2021 financial results on August 20 showed a robust rise in adjusted earnings and revenue. Adjusted earnings per ADS rose 18.0% compared to the year-ago quarter, marking an acceleration in YOY growth compared to the final quarter of FY 2020. Revenue grew 33.8%, also an acceleration in YOY growth compared to Q4.

During Q4 FY 2020, which ended March 31, 2020, pandemic-related lockdowns, social-distancing requirements, and travel restrictions severely hampered the Chinese economy. Alibaba still posted growth in adjusted earnings per ADS and revenue of 7.4% and 22.3%, respectively. But this was the slowest pace of growth in eight quarters for earnings, and the worst growth for revenue in at least 13 quarters.

Analysts expect both earnings and revenue to continue to grow in Q2 FY 2021, but at a slower YOY pace than during the first quarter of the year. Adjusted earnings per ADS is forecast to rise 9.4% as revenue grows 30.5% compared to the same three-month period a year ago.

Alibaba Key Metrics
  Estimate for Q2 2021 (FY) Q2 2020 (FY) Q2 2019 (FY)
Adjusted Earnings Per ADS 14.33 yuan 13.10 yuan 9.60 yuan
Revenue 155.3 billion yuan 119.0 billion yuan 85.1 billion yuan
Annual Active Consumers in China 756.5 million 693.0 million 601.0 million

Source: Visible Alpha

As mentioned, investors also will focus on Alibaba's annual active consumers in China. This key metric tracks the total number of user accounts that placed at least one confirmed order through Alibaba's China retail marketplaces in the last 12 months. The metric ignores whether or not the transaction was actually 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. But more active consumers also means more people exposed to Alibaba's cloud and entertainment businesses, key areas of future growth.

Alibaba's annual active consumers in China have steadily risen over the last couple of years, but at a decelerating pace. In Q3 FY 2019, annual active consumers grew 23.5% YOY. In FY 2020, YOY growth decelerated from a pace of 17.0% in Q1 to 11.0% in Q4. Despite the increase in online activity triggered by the pandemic, that pace of growth slowed to 10.1% in Q1 FY 2021, which ended June 30, 2020. Analysts expect it to slow further in Q2 FY 2021, rising by 9.2%. Nonetheless, that growth would boost Alibaba's active annual consumers in China to 756.5 million, the largest number in at least several years.