Even through a 4.07% drop before the report day showing Alibaba Group Holding Ltd (All Sessions) investors had little expectation for the Chinese ecommerce giant given all the bumpy hurdles that it had gone through, the disappointing Q2 earnings still dragged the BABA’s share price down much further.

What does the Q2 earnings show?

Based on Alibaba’s Q2 earnings, the ecommerce giant reported non-GAAP earnings per share (EPS) of $1.74, missing the estimate of $1.93, representing a shocking 37.7% decline compared to the same period last year. Revenue was also reported as a miss, totalling $31.15 billion as opposed to the estimated $32.05 billion.

Annual active consumer globally is the only beat that has reached approximately 1.24 billion, more than four-times the size of Amazon (300 million), with a quarterly net increase of 62 million consumers.

Alibaba earnings results

^{Source: VisibleAlpha}

Quarterly earnings surprise amoune

^{Source: Nasdaq.com}

Why is the market disappointing?

Fundamentally, investors are concerned about the company’s long-term profitability. Although the group’s revenue still grew by 29% year-over-year, its adjusted EBITA margin for the most profitable sector ‘commerce’ decreased from 35% in the quarter ending 30 September 2020 to 19% a year after, shrinking by a worrying 45%. Alibaba didn’t deny thinner margin in the report, stating “we expect that our commerce adjusted EBITA margin will continue to be affected by the pace of our investment in key strategic areas”.

Actually, Alibaba's operating margin has been declining for some time. In 2014, the company’s margin sat at around 45% when their active user size was only one-fourth of what it is today. This means the ecommerce giant’s margin has been reducing by an average of 12% every year.

Adjusted EBITA and adjusted EBITA margin by segments (in millions, except percentages)

^{Source: Alibaba}

On the other hand, Alibaba’s challenge is not just a matter of fundamental valuation, but a matter of risks. As the open window into the impact of Beijing’s regulatory curbs, Alibaba coincided other Chinese stocks listed in the U.S. are reporting similar troubling results this quarter. For example, Tencent last week reported its slowest revenue growth since 2004, fuelled with the growing concern over the company’s long-term picture under the environment that was walloped by macroeconomic and regulatory turmoil.

Alibaba technical analysis

Over the past twelve months, Alibaba's shares have provided a total return of -37.1%, well below the US 500's total return of 29.9%.

From a technical standpoint, the freefall from this week has left a big gap between $146 to $160, which became the critical resistance level if the price is seeking higher in the near term. The candlestick is now sitting in the previous gap from October, with the support level at $139. If the bearish momentum stays, a further down to two-year-low at $130 may be in view.

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Hebe Chen | Market Analyst, Australia
22 November 2021