The Chinese e-Commerce goliath, Alibaba Group Holding Limited (NYSE:BABA), which went public in September, will report the results for third-quarter 2014 (ended Sep 30) on Nov 4, before the U.S. market opens.
Factors at Play
Alibaba Group’s second-quarter revenues (ended Jun 30) were RMB15.771 billion ($2.54 billion), up 46.3% from the year-ago period, driven by solid growth in mobile business. The e-Commerce giant's two most popular sites — Taobao and Tmall — posted strong growth. Taobao’s gross merchandise volume (GMV) was RMB342.0 billion, up 33.1% year over year, while Tmall's GMV was RMB159.0 billion, soaring 80.7% year on year.
The company’s profit margin, higher than most industry peers, has narrowed since the last year due to heavy expenditure on its e-Commerce services through smartphones and tablets. Therefore, margins in the June quarter were 70.9%, down 380 basis points (bps) from the year-ago quarter due to higher-than-expected product development and sales & marketing expenses.
For the upcoming quarter, most of the investors expect Alibaba to issue encouraging earnings guidance, fueled by strong growth in both its retail shopping platforms — Taobao and Tmall.
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, 2 or 3 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 is higher at 37 cents. That is a difference of -10.81%.
Zacks Rank: Alibaba Group’s Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we need to have a positive ESP to be confident of an earnings beat.
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
Here are some companies, which you may consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:
AmSurg Corp. (NASDAQ:AMSG), with an Earnings ESP of +18.52% and a Zacks Rank #1 (Strong Buy).
MFA Financial, Inc. (NYSE:MFA), with an Earnings ESP of +5.26% and a Zacks Rank #1.
Redwood Trust, Inc. (NYSE:RWT), with an Earnings ESP of +25.81% and a Zacks Rank #1.