Lately, Wall Street has seen Alibaba’s earnings as evidence the company, like it’s namesake, is more of an imposter than impressive.
Last quarter, for instance, the company beat predictions, posting a 55% increase in revenue over the previous year. Nonetheless, investors dumped the stock. Shares of Alibaba (baba) dropped to $87.37 at the end of 2016, from as high as $109.87 in September.
Alibaba is set to report its quarterly earnings for the final three months of 2016 before trading Tuesday. It’s supposed to be another good quarter. But Alibaba’s stock has run up again, now back to a recent $98.50, which could be the problem.
Alibaba’s four main divisions—e-commerce, cloud computing, digital media, and other investments—all showed strong growth throughout 2016, which bodes well for what the company will report on Tuesday. Further buoying the strong expectations is the fact that the quarter covers the holiday shopping season and Single’s Day, which Alibaba (baba) turned into a massive shopping day in 2009 akin to black Friday and cyber Monday in America. Last year, Single’s Day generated $17.8 billion in sales. All told, the Chinese online retailing giant is expected to post $7.3 billion in revenue, with earnings per share coming in at $1.12, according to Bloomberg. That would be growth of 64% from a year ago.
The problem is Wall Street is expecting that and more. Alibaba has been pushing into cloud computing services in order to carve out a space for itself in a market that accounted for $103 billion in 2015, and could be worth as much as $513 billion by 2022, according to a report on EIN Newsdesk. But in its effort to take on other giants like Amazon (amzn) and Microsoft (msft), the service has been operating at a loss. Still, there is plenty of upside while the company finds its niche in the market. The company reported its cloud computing revenue grew 130% last quarter.
And that has pushed up Alibaba’s growth expectations. After the recent run up, Alibaba’s shares now have a price-to-earnings ratio of 30 based on this year’s earnings. Investors often measure P/Es vs. growth rates. The company will easily clear its growth hurdle implied by the stock this quarter, and next.
But that is in part because the 2015 earnings that this year’s numbers are being compared to were a disappointment, leaving a lot of room for a big bounce in its 2016 and early 2017 earnings. (Alibaba’s fiscal year ends in March.) But by later this year, earnings at the Chinese ecommerce giant is supposed to slow to just 25%. And that’s why investors keep looking for indications, especially from its cloud business, that the company’s earnings in the future can be even better.
So it will be interesting to see how investors respond this time around to what is expected to be more good news, but perhaps, again, not good enough.