Alibaba: Margins Might Surprise to the Upside in June Quarter, Says J.P. Morgan

With the year’s first half done and dusted, companies will now begin dialing in the latest quarter’s financial statements. Next month, Alibaba (BABA) will deliver its earnings report for first quarter of fiscal year 2023 (June quarter).

In recent times, the slowing demand amongst consumers, rising competition and the uncertain macro picture have all impacted Alibaba’s top-line. In fact, 4QF22 amounted to the slowest quarterly revenue growth since the Chinese ecommerce behemoth became a public entity in 2014.

That said, according to NBS, in May, nationwide online physical goods’ GMV (gross merchandise value) rose by 7% year-over-year, while Alibaba’s management also made some positive commentary regarding a y/y uptick in GMV during the 618 shopping festival.

As such, J.P. Morgan’s Alex Yao thinks some investors might be expecting “upside risk” to Alibaba’s CMR (customer management revenue) in the June quarter. On this front, however, Yao pours cold water on expectations.

“The core-core CMR revenue,” says the analyst, “may not have much room for positive surprise, due to order cancellations as a result of logistics network disruption (i.e. a temporary deviation between gross GMV growth and fulfilled GMV growth), which would negatively hurt Tmall’s commission revenue.”

That said, Yao thinks the good news might lie elsewhere. Along with the contracting top-line, Alibaba’s profit profile has taken a hit, given the company’s heavy investments. However, there might be some changes here which will favorably affect margins.

For one, Yao notes this year’s advertising push for 618 was rather muted, while several media outlets have reported that the company has “downsized several business lines.”

“We believe these developments are in line with the management’s message to focus on managing healthy cashflow and improving efficiency in FY2023,” Yao commented. “Given management’s commitment to cost optimization, we think margins could offer room for positive surprise in coming quarters.”

As such, expecting a “gradual ecommerce recovery,” and turning “more positive” on Alibaba’s margin outlook, Yao has raised his price target for the stock from $130 to $140, suggesting shares have room for ~17% growth in the year ahead. Additionally, with BABA being one of Yao’s “top picks in the China Internet universe,” the analyst rates the stock an Overweight (i.e. Buy). (To watch Yao’s track record, click here)

The rest of the Street supports Yao’s thesis. In fact, the average price target is more upbeat; at $159.72, the figure is expected to yield 12-month returns of ~33%. The stock boasts a Strong Buy consensus rating, based on 19 Buys, 2 Holds, and 1 Sell. (See Alibaba stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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