Key Takeaways

  • Adjusted earnings per ADS was 22.03 yuan vs. the 21.07 yuan analysts expected.
  • Revenue beat analyst expectations.
  • Annual active consumers in China was higher than the level estimated by analysts.
  • Alibaba Cloud achieved positive adjusted EBITA for the first time.

What Happened

Alibaba reported Q3 FY 2021 earnings per ADS that surpassed analyst expectations. Revenue was also above analyst forecasts and exhibited an acceleration in YOY growth compared to recent quarters. Annual active consumers in China were higher than expected. Alibaba also noted that its cloud business achieved positive adjusted earnings before interest, taxes, and amortization (EBITA) for the first time.

(Below is Investopedia's original earnings preview, published February 1, 2021.)

What to Look For

Alibaba Group Holding Ltd. (BABA), the Chinese e-commerce giant that's successfully expanding amid the COVID-19 pandemic, has found itself in the crosshairs of China's market watchdog. The Chinese State Administration for Market Regulation has launched an antitrust probe into Alibaba, mirroring the antirust investigations U.S. regulators have launched against big American tech firms Facebook Inc. (FB) and Google parent Alphabet Inc. (GOOGL).

Investors will be watching to see how Alibaba is dealing with the China antitrust probe, and also whether the company can maintain its robust growth when it reports earnings on February 2, 2021 for Q3 FY 2021. Alibaba's fiscal year (FY) ends in March. Analysts expect adjusted earnings per American Depositary Share (ADS) and revenue to post healthy gains compared to the year-ago quarter.

Investors also will 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 annual active consumers in China to grow, but at a slower rate than in recent years.

Shares of Alibaba have outperformed the broader market over the past year. But that performance has been volatile. After reaching a recent peak in late October in anticipation of a public listing of Alibaba's financial-technology affiliate, Ant Group Co. Ltd., the stock tumbled when the IPO was blocked by Chinese regulators. It received another big setback in late December after regulators launched an antitrust investigation. The shares have recovered some of their losses and have provided a total return of 24.0% over the past 12 months, above the S&P 500's total return of 15.6%.

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

Alibaba's stock initially jumped after reporting earnings for Q2 FY 2021. Adjusted earnings per ADS climbed 37.2%, its fastest rise since Q3 FY 2020. Revenue rose 30.3%, a robust pace but slightly below what analysts were expecting. The company highlighted the strong performance of its core commerce and cloud computing businesses. However, the stock quickly resumed its downward trend.

In Q1 FY 2021, Alibaba posted an 18.1% rise in adjusted earnings per ADS as revenue rose 33.8%. While the company's revenue is still growing at a fast pace, it has decelerated from growth rates between 56-61% between late FY 2017 and early FY 2019. The stock continued its upward trend over subsequent months until its peak at the end of October.

Analysts are forecasting that both earnings and revenue will rise in Q3 FY 2021. Adjusted earnings per ADS is expected to grow 15.8%, the slowest pace since Q4 FY 2020. Revenue is expected to rise 33.1%. For full-year FY 2021, analysts expect adjusted earnings per ADS to rise 27.9% while revenue climbs 37.3%. It would mark a deceleration in annual earnings growth from the previous year, but a slight acceleration in annual revenue growth.

Alibaba Key Metrics
  Estimate for Q3 2021 (FY) Q3 2020 (FY) Q3 2019 (FY)
Adjusted Earnings Per ADS 21.07 yuan 18.19 yuan 12.19 yuan
Revenue 214.9 billion yuan 161.5 billion yuan 117.3 billion yuan
Annual Active Consumers in China 773 million 711 million 636 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. Annual active consumers in China grew 21.6% for all of FY 2018, slowing to 18.5% in FY 2019, and then to 11.0% in FY 2020. That pace of growth further slowed to 10.1% in Q1 FY 2021 and again to 9.2% in Q2 FY 2021. As Alibaba has grown bigger, it has become harder to achieve rapid growth off of a bigger and bigger user base. Analysts expect further deceleration in Q3 FY 2021, to a pace of 8.7%. Nonetheless, that growth would boost Alibaba's annual active consumers in China to 773 million. For all of FY 2021, analysts expect annual active consumers in China to rise 8.1% to 784.6 million. That annual number would amount to 330 million more users than Alibaba had five years ago in in fiscal 2017.