China’s slowdown could hurt Alibaba’s earnings. Here’s what analysts expect

Published Mon, Nov 15 202110:02 PM EST

China's economic headwinds and slowing retail sales growth could weigh on Alibaba 's fiscal second quarter earnings when it reports numbers on Thursday . Some analysts have downgraded their price target on the stock on concerns that slowing e-commerce sales as well as the regulatory crackdown on China's technology sector could hurt the company's outlook. However, others say Alibaba's valuation is cheap at current levels and the company should perform well over the long term. Alibaba has had a rough year along with many of its peers in the technology sector as Chinese regulators tightened scrutiny. Beijing has introduced a slew of laws in areas from data protection to anti-monopoly rules for the so-called platform economy and regulations on unfair competition in the internet sector . In April, Alibaba was fined 18.23 billion yuan ($2.8 billion) as part of an anti-monopoly probe. After hitting a record high in October last year, Alibaba's shares in the U.S. have lost about 40% of its value, wiping off billions of dollars. "We believe 2Q FY22 is likely to be one of the most challenging quarters for Alibaba," John Choi, analyst at Daiwa Capital Markets, said in a note published in September. Here's what analysts are expecting from Alibaba's fiscal second quarter earnings, according to Refinitiv estimates. Revenue: 204.93 billion yuan ($32.16 billion) EPS: 12.36 yuan ($1.93) Macro headwinds Several analysts are concerned about the macroeconomic headwinds that could hit Alibaba's numbers. China's economy grew 4.9% in the third quarter from a year ago, according to the National Bureau of Statistics. That was slower than analysts had expected. China's economy has also faced a number of economic challenges including power shortages and severe flooding which has hit supply chains. Analysts also noted a slowdown in online retail sales in the world's second-largest economy, which is likely to have an impact on Alibaba's key revenue driver. Customer management revenue, or CMR, is the single largest portion of Alibaba's sales. CMR is revenue Alibaba gets from services such as marketing that the company offers to merchants on its Taobao and Tmall e-commerce platforms. Morgan Stanley said in a September note that it forecasts CMR growth for the quarter at 5.2%, versus 13.7% in the quarter ending June, "given weak macro conditions with limited monetization improvement." China Renaissance, meanwhile, lowered its CMR growth for the quarter from 12% to 8% year-on-year. Cloud growth constrained Cloud computing is an area where Alibaba has put a lot of effort into the past few years. It is now the number one cloud computing player in China. In the quarter that ended December 2020, the division turned a profit for the first time . However, in the June quarter, Alibaba said that a "top cloud customer in the internet industry" stopped using the company's overseas cloud services for their international business due to "non-product related requirements." This will likely continue to constrain growth in the September quarter, analysts said. Choi of Daiwa Capital Markets forecast cloud revenue to grow 27% year-on-year in the fiscal second quarter "as it may take a few quarters for the company to regain momentum after the loss of an international customer." In the previous quarter, cloud computing revenue grew 29% year-on-year. Morgan Stanley expects cloud revenue in the September quarter to come in at 19.4 billion yuan, growing 30% versus the same period last year. However, the U.S. investment bank said it expects improvement in the EBITA (earnings before interest, taxes, and amortization) margin, a measure of the company's profitability. Profit outlook Alibaba is investing in other e-commerce products too. It includes Taobao Deals, a discount shopping app, and secondhand marketplace called Idle Fish. These could be key to growing Alibaba's user base among more price sensitive consumers in China's smaller cities. Analysts expect user growth to remain strong in these new initiatives, but losses for the quarter could still widen. That, alongside slower growth in cloud computing and its core commerce business, could be a drag on profit growth. "Although investment in Taobao Deals and Community Marketplaces will likely drag down core commerce EBITA in FY22, we see a chance that the losses will peak in 2Q 3Q FY22 and trend down in 4Q FY22," according to the note by Daiwa Capital Markets. "Overall, we believe Alibaba's core commerce business is likely to remain under pressure in FY22 while it is too early for its new initiatives to have a meaningful revenue contribution." What this means for the stock Despite short-term headwinds, many analysts are still bullish on Alibaba's stock, particularly given the sell-off over the past few months. Still, they have lowered their price targets. The average 12-month price target on Alibaba's U.S.-listed stock is $243.13, implying a 46% upside to Tuesday's closing price, according to Refinitiv data. That's down from an average price target of $337.42 on Jan. 1 this year. China Renaissance said the key risks for Alibaba include regulation, increased competition and macroeconomic uncertainty.

Alibaba signage outside its office.

Costfoto | Barcroft Media | Getty Images

China's economic headwinds and slowing retail sales growth could weigh on Alibaba's fiscal second quarter earnings when it reports numbers on Thursday.