Factor at Play
Alibaba Group’s third-quarter earnings of 55 cents missed the Zacks Consensus Estimate by 7 cents due to higher-than-expected expenses. However, revenues of RMB26.2 billion (US$4.219 billion) surged 39.7% from the year-ago period driven by the consistent growth in its e-Commerce business.
The strong growth in its mobile business and increasing user engagement aided revenues. We expect this trend to grow and positively impact the to-be-reported quarter results.
However, Alibaba’s profit margin — higher than most industry peers — has narrowed in the last year due to heavy expenditure on its e-Commerce services through smartphones and tablets. Therefore, operating margins in the third quarter were 35.7%, down from the year-ago quarter level of 47% due to higher-than-expected product development and sales & marketing expenses.
Some of the current buoyancy surrounding the shares is related to Alibaba’s strong dominance in the mobile search market and its continuous efforts to develop new products. However, the increased investments in mobile, marketing and other new ventures could impact fourth-quarter results.
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, 2 or 3 for this to happen. This is not the case here, as you will see below.
Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 28 cents. Hence, the difference is 0.00%.
Zacks Rank: Alibaba Group’s carries a Zacks Rank #4 (Sell).
We caution against stocks with Zacks Rank #4 and 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:
Nordic American Tanker Ltd. (NYSE:NAT), with an Earnings ESP of +14.81% and a Zacks Rank #1 (Strong Buy).
Suburban Propane Partners LP (NYSE:SPH), with an Earnings ESP of +6.15% and a Zacks Rank #1.
Brookfield Asset Management Inc. (USA) (NYSE:BAM), with an Earnings ESP of +2.99% and a Zacks Rank #1.