Alibaba Group Holding Limited BABA is set to report first-quarter fiscal 2016 results on Aug 12. Last quarter, the company posted a 28.6% negative earnings surprise.
Let’s see how things are shaping up for this announcement.
Factor at Play
Alibaba Group’s fourth-quarter fiscal 2015 earnings of 20 cents missed the Zacks Consensus Estimate by 8 cents due to higher-than-expected expenses. However, revenues of RMB17.4 billion (US$2.811 billion) rose 44.8% year over year driven by consistent growth in its e-Commerce business.
The strong growth in mobile business and increasing user engagement aided revenues. We expect this trend to continue and positively impact the to-be-reported top-line results.
However, Alibaba’s profit margin — higher than most industry peers — has narrowed since last year due to heavy investment in its e-Commerce services through smartphones and tablets. Therefore, operating margins in the fourth quarter came in at 22.7%, much lower than the year-ago quarter level of 49.5% due to higher-than-expected product development and sales & marketing expenses.
Some of the current buoyancy surrounding the shares is related to the Chinese e-Commerce goliath’s strong dominance in the mobile search market and its continuous efforts to develop products. However, increased investments in mobile, marketing and other new ventures could impact first-quarter results.
Earnings Whispers
Our proven model does not conclusively show that Alibaba Group will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.
Zacks ESP: The Most Accurate estimate stands at 33 cents, while the Zacks Consensus Estimate stand at 41 cents. Hence, the difference is -19.51%.
Zacks Rank: Alibaba Group carries a Zacks Rank #4 (Sell).
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
You could consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:
Teekay Corporation TK, with an Earnings ESP of +96.30% and a Zacks Rank #1.
Ashford Hospitality Trust, Inc. AHT, with an Earnings ESP of +5.41% and a Zacks Rank #1.
Navios Maritime Acquisition Corporation NNA, with an Earnings ESP of +7.69% and a Zacks Rank #2.
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