Last week, US technology companies outperformed, with Facebook and Amazon announcing strong earnings. This week, we will be watching results and commentary from Apple and Alibaba which are holdings in the VFTP Thematic Model portfolio.
On Friday morning, China's e-commerce leader will report its 4Q fiscal year results. The consensus, according to Zack’s, is for revenue growth up 64% to $9.2bn and earnings-per-share up 37% to 86 cents. The stock is down 15% from its January highs on general weakness in Chinese internet companies, fears of a trade war between China and the US and worries about the firm’s declining margin.
When investors look at the details of Alibaba’s report and listen to the earnings call, there will be several key factors they will be focusing on. First, margin trend. The compression in net margins has been occurring for about two years, but the drop last quarter was fairly sharp, totaling approximately 800 bps. This is happening primarily because of their expansion into additional business segments and other geographies. The company has been making an aggressive entry into bricks-and-mortar retailing with purchases of department store chain, Intime, and China's biggest grocer, Hema. The firm has said that this “new retail” will be used to connect online and offline shopping and will offer advantages to traditional stores by improving their data, marketing, inventory and distribution management. Alibaba has said that these new investments would lead to smaller margins in the short-term, but higher profits over time.
Another metric analysts will be watching is the trend in its core e-commerce business. Overall, online spending is expected to double in China this year with Alibaba taking the bulk share of those transactions. It is expected that this revenue will grow about 46 to 47% year-over-year in the 4Q FY making up 65% of the company’s total revenues.
Another area of interest is the company’s aggressive expansion into new businesses and overseas opportunities. These are seen as crucial to future growth momentum. Last quarter, Alibaba agreed to pay an extra $2 billion to increase its stake in South East Asian e-commerce firm, Lazada. This market is still at a nascent stage but, with its young populations, has enormous opportunities going forward. Additionally, the cloud segment, while still small, bringing in about 5% of company revenues, is important because it is expanding at triple digits, about 103% y/y, and is also a source of growth
Finally, investors will be listening for guidance on Ant Financial. Alibaba’s profit share from Ant will most likely continue to fall because of increased costs from Ant and the ending of a promotion to boost Alipay users. In the 3Q FY period, the contribution was $30 million compared to $300 million the quarter before. However, Alibaba is now ending its profit-sharing agreement with the firm and switching to equity stake of 33%. This was done to deepen ties with its subsidiary and take advantage of the Ant listing which will happen later this year.
Alibaba is down about 15% from its January highs on specific company and China concerns, but we view is as a core technology holding to take advantage of the growth in the Chinese consumer, e-commerce and the expansion of mobile payments. We added to the position on recent weakness viewing the valuation of 20x fiscal 2019 earnings estimates, not cheap, but at its lowest level in two years.
View from the Peak
IND-X Advisors Limited