Should China’s largest e-commerce player offer a hopeful outlook guidance over its post-lockdown recovery, that could compel its shares to advance further, following gains earlier this week on news that Alibaba could be added to the Hang Seng index in August. The official entry into the city’s benchmark stock index could attract some HK$5 billion (US$650 million) of passive fund inflows towards Alibaba.
Due to the forward-nature looking of the markets, Monday’s announcement enabled Alibaba’s shares to break out of its slump, breaching the downward trend line seen over the past four months.
Looking ahead to Friday, market participants are already pricing in more volatility as the earnings announcement looms closer. The options markets show traders expecting an implied 1-day move of 4.84 percent around the release date, which is higher than the average of 3.58 percent price swing over the past 22 earnings announcements, according to Bloomberg data. A 4.84 percent move to the upside from Tuesday’s closing price would bring Alibaba’s shares to within one percent of its highest close on record, and allow it to catch up with gains seen in the S&P 500 and Nasdaq since the March 23 low.
When Alibaba unveils its January-March performance figures after Hong Kong markets close and before the US opens for the final trading day of the week, shareholders will be assessing whether the overall drop in disposable income levels will offset the projected rise in online sales during the lockdown. In other words, how well did Alibaba’s over 700 million annual active consumers fare during the quarantine, a period which also disrupted customers’ livelihoods, merchant operations, and logistics.
Keep in mind also that China was the first major economy to emerge from the coronavirus-induced lockdown, after a Q1 GDP contraction of 6.8 percent year-on-year, its first negative reading since records were first published in 1992. Retail sales for the quarter saw a minus 19 percent print compared to the same period in 2019. However, online sales of physical goods during those three months grew 5.9 percent on an on-year basis.
Investors will be eager to find out how such top line figures filtered into Alibaba’s performance in the final quarter of its fiscal year. At the time of writing, markets are expecting a 14 percent rise in revenue with a 13 percent year-on-year decline in profit, with the one billion Chinese Yuan (US$141 million) in subsidies offered to offset the anticipated drop in spending likely weighing on the company’s bottom line.
Kill, or be killed
Alibaba is also seen as a bellwether of the post-pandemic recovery for global e-commerce players, and its guidance for the coming quarters should have major say on its near-term stock performance. Over the longer term, the company is seeking to further diversify its earnings base, from expanding aggressively into the Southeast Asian market, to investing heavily into other units such as cloud computing and digital entertainment which have yet to positively contribute to its operating income.
Chairman and CEO, Daniel Zhang has already pledged to “kill” its existing business with cannibalistic ventures, and it remains to see whether such risky yet innovative investments will pay off. Until then, Alibaba’s fortunes remain very much reliant on core commerce, which has contributed over 85 percent of total revenue over the last three fiscal quarters.
Written on 05/20/20 07:00 GMT by Han Tan, Market Analyst at FXTM
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This article was originally posted on FX Empire