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Earnings Outlook: Alibaba inventory has taken a blow from crackdowns in China, however its positive factors might be a special story

Alibaba Group Holding Ltd. will focus on business again on Tuesday after a difficult period for the broader Chinese internet sector.

Chinese tech stocks have plummeted in the past few weeks on concerns over government crackdown on powerful tech companies. China has the ride-hailing giant Didi Global Inc.
I HAVE,
+ 4.56%
shortly after going public and more recently has targeted online education companies in the country.

Alibaba
BABA,
-1.19%
is no stranger to regulatory action in China after paying a $ 2.8 billion antimonopoly fine earlier this year for treating some traders looking to sell on other platforms. The company also owns a 33% stake in Ant Group Co., the Jack Ma-affiliated financial technology company that will be subject to government oversight after regulators cracked down on Ant's sprawling business and halted the anticipated IPO, the largest in the To be history.

From the archives (September 2020): Ant Group IPO: Five Things You Should Know Before The Biggest Offer In History Of The Alibaba Subsidiary

The moves have raised fears that the Chinese government is planning a tougher stance on private companies in general, which could pose risks to US investors. Against this backdrop, US-listed shares of Alibaba fell 13.9% in July, their worst monthly performance in more than two years.

Opinion: This is your final warning – Chinese stocks listed in the US are dangerous to hold

"We believe that most of these new regulations will not affect Alibaba, although investors are clearly concerned about the increased regulatory focus," wrote Raymond James analyst Aaron Kessler in a customer announcement.

The regulatory narrative has dominated lately, but Alibaba can try to focus more on its own story when it reports its June quarter results on Tuesday morning. The results will show how the overall Chinese e-commerce landscape is evolving and the progress Alibaba has made in the lower Chinese cities, where it has invested heavily in growing its business.

The 6:18 am Chinese shopping festival fell during the quarter, and the company's comment on merchant involvement left Truist analyst Youssef Squali "encouraged by Alibaba's strong 6:18 am performance amid an increasingly competitive Chinese e-commerce landscape."

Strong results in the trading business could help distract from regulatory issues that are beyond Alibaba's control, noted Baird analyst Colin Sebastian.

"The regulatory overhang could subside as the business fundamentals turn out to be largely intact," he wrote in a message to his clients, although he is taking a measured approach with a view to the last quarter. "While the macro environment in China has largely stabilized, retail sales growth slowed slightly over the quarter and is likely to limit significant short-term upside potential."

What to look out for

Revenue: Analysts tracked by FactSet estimate that Alibaba achieved sales of RMB 209.1 billion in the first fiscal quarter ended June, up from RMB 153.8 billion a year earlier. The estimate includes sales of RMB 183.6 billion from its core Commerce business.

Merits: The FactSet consensus calls for adjusted earnings per share of RMB 14.33 for the June quarter, compared to RMB 14.82 last year.

warehouse Move: Alibaba will seek to thwart the odds with its upcoming report as its shares fell in the session following the last seven earnings reports. Alibaba stock is down 23% in the past 12 months as the KraneShares China Internet ETF
KWEB,
-2.55%
is down 24% and the S&P 500
SPX,
-0.54%
has increased by 35%.

What else to look out for

Alibaba said in its latest earnings announcement that it planned to reinvest all of its additional profits in the business during this current fiscal year, and investors will look to the upcoming conference call for more details on those investments.

The company invests money in a number of areas including Taobao Deals, which is aimed at budget-conscious consumers, and New Retail, which aims to bring together online and offline shopping experiences.

See also: SEC sets new disclosure requirements for IPOs by Chinese companies

"Given the importance of these investments and their diluting effect on overall margins, we believe additional insight and disclosure on this matter would be beneficial to the stock in the short and medium term," wrote Squali of Truist.

“However, the willingness of the company to invest against these massive growth opportunities and to protect its territory from emerging platforms like Meituan encourages us
3690,
-5.87%
and Pinduoduo
PDD,
-0.53%,
which should expand Alibaba's customer base in China's lower cities and less affluent shoppers, increase engagement and frequency, and ultimately increase the wallet share, ”he continued.

Another area to watch will be the cloud business. Mizuho analyst James Lee expects revenue for this segment to match consensus growth forecast of 38%, which "would reflect the loss of a major international order from last quarter." He realizes that the segment wants to increase its sales force.

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