Alibaba’s stock has been hit by the crackdown in China, but its profits could be a different story – .

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Alibaba’s stock has been hit by the crackdown in China, but its profits could be a different story – .



Alibaba Group Holding Ltd. will seek to refocus attention on its business on Tuesday after a difficult period for the Chinese internet industry at large.

Chinese tech stocks have been hit in recent weeks amid concerns over the government crackdown on powerful tech companies. China cracked down on carpooling giant Didi Global Inc. DIDI,
+4,56%
just after its IPO and has more recently targeted online education companies in the country.

Alibaba BABA,
-1,19%

is no stranger to regulatory measures in China, having paid an anti-monopoly fine of $ 2.8 billion earlier this year for his treatment of some traders who wanted to sell on other platforms. The company also has a 33% stake in Ant Group Co., the financial technology firm affiliated with Jack Ma that will come under government scrutiny after regulators cracked down on Ant’s sprawling business and shut down. an initial public offering that was expected. to be the greatest in history.

Archives (September 2020): Ant Group IPO: Five Things to Know About Alibaba Affiliate Before Biggest Offer in History

These measures have raised fears that the Chinese government may consider a tougher stance towards private companies more generally, which could pose risks for U.S. investors. Against this backdrop, Alibaba’s US-listed shares fell 13.9% in July, their worst monthly performance in more than two years.

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“We believe most of these new regulations have no impact on Alibaba, although investors are clearly concerned about an increased focus on regulation,” wrote Aaron Kessler, analyst at Raymond James, in a note to clients.

The regulatory narrative has dominated lately, but Alibaba may try to focus more on its own story when it releases its June quarter results on Tuesday morning. The results will show how the Chinese e-commerce landscape is doing as a whole, as well as the progress Alibaba is making in lower-tier Chinese cities, where it is investing heavily to grow its business.

The 6.18 China mid-year shopping festival fell in the quarter, and the company’s comment on merchant participation left Truist analyst Youssef Squali feeling “encouraged by Alibaba’s strong performance this year. 6.18 in an increasingly competitive Chinese e-commerce landscape ”.

Strong results in the commerce sector could help distract attention from regulatory issues beyond Alibaba’s control, noted Baird analyst Colin Sebastian.

“Regulatory overhang could start to ease as the business fundamentals prove largely intact,” he wrote in a note to clients, although he takes a measured approach when examines the most recent quarter. “While the macroeconomic environment in China has largely stabilized, retail sales growth moderated slightly during the quarter and is likely to limit a significant increase in the near term. “

What to watch

Income: Analysts tracked by FactSet expect Alibaba to have revenue of RMB 209.1 billion in its first fiscal quarter, which ended in June, from RMB 153.8 billion. one year earlier. The estimate includes 183.6 billion RMB of income from the main activity of commerce.

Gains: Consensus FactSet forecasts adjusted earnings per share of RMB 14.33 in the June quarter, down from RMB 14.82 a year earlier.

Stocker movement: Alibaba will look to score a streak with its next report, as its shares fell in the session after its last seven earnings reports. Alibaba shares have lost 23% in the past 12 months as Internet ETF KraneShares China KWEB,
-2,55%
fell 24% and like the S&P 500 SPX,
-0,54%
increased by 35%.

What else to watch out for

Alibaba said in its latest earnings release that it plans to reinvest any additional earnings in the business in the current fiscal year, and investors will seek more details on those investments in the next earnings call.

The company is investing money in a number of areas, including Taobao Deals, which targets price-conscious consumers, and New Retail, which seeks to merge online and offline shopping experiences.

See also: SEC to Establish New Disclosure Requirements for Chinese Company IPOs

“Given the importance of these investments and their dilutive effect on overall margins, we believe that additional information and information on this subject would be positive for the stock in the short and medium term.[s]Wrote Truist’s Squali.

“That said, we remain encouraged by the company’s willingness to invest against these massive growth opportunities and to protect its territory against rising platforms like Meituan 3690,”
-5,87%
and PDD Pinduoduo,
-0,53%,
which should expand Alibaba’s customer base to lower-tier cities in China, less affluent buyers, boost engagement and frequency, and ultimately share the portfolio, ”he continued.

Another area to watch will be the cloud industry. Mizuho analyst James Lee expects this segment’s revenue to be in line with the consensus growth forecast of 38%, which “would reflect the loss of a major international contract from the last one.” trimester “. He notes that the segment is looking to increase its sales force.

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