How Alibaba Is Winning the Trade War

Despite the negative impact of the U.S-China trade war, e-commerce giant Alibaba Group Holdings Inc. (BABA) seems to be thriving as it prepares to post its most recent quarterly earnings report in less than one month. Shares of the Hangzhou-based Internet giant are up sharply this year, thanks in part to Alibaba’s rapid growth in its domestic market. Bulls expect Alibaba’s stock to maintain its momentum into the second half of the year, lifting its market value above its current level at approximately $462 billion. 

Shares of Alibaba have outperformed the broader market this year, up nearly 30% year-to-date (YTD) compared to the S&P 500’s 19.8% return over the same period. For the upcoming quarter, analysts are forecasting earnings to jump about 28% year-over-year (YOY) to $1.50 per share. Optimism has been driven by expectations for continued strength from Alibaba’s Tmall platform, which posted a 38.5% gain in sales during a wave of promotions known as the “618 shopping festival,” per Barron’s.

“The solid 618 performance has given our checks incremental confidence in Alibaba’s performance for the remainder of the year, ” wrote Susquehanna analyst Shyam Patil in a recent note to clients reported on by Barron’s.

Another bright spot for Alibaba is the market potential in China’s second-tier cities. The e-commerce behemoth’s revenues from smaller cities grew more than 100% YOY during the 618 sales wave, which ran from June 1 through June 18. The rapid growth of Alibaba’s business outside of the bigger cities shows that these markets are yet to be fully saturated. 

The second-tier Chinese cities are also where Alibaba will fight its next battle for e-commerce dominance, per Barron’s. Rivals are already gaining ground in China’s less populous regions. For example, Alibaba competitor Pinduoduo Inc. (PDD) said its sales jumped by a whopping 300% over last year during the 618 sales extravaganza. 

That said, Patil still believes that Alibaba will maintain a leg up against competitors thanks to its robust ecosystem of services widely used in China. These include payments app Alipay and food delivery platform Ele.me. The Susquehanna analyst expects these ancillary services to gain traction in smaller cities and build brand loyalty with Alibaba. This will help Alibaba spend less on marketing in those regions, per Patil. 

David Dai, an analyst with Sanford C. Bernstein in Hong Kong, echoed this upbeat sentiment, noting that Alibaba’s ecosystem of interconnected products and services puts it in a “much stronger position as compared to any other internet or e-commerce company in China,” according to The New York Times. 

The Susquehanna bull now expects Alibaba’s EBITDA to come in at 149.5 billion yuan ($21.7 billion) in the fiscal year which began in April, compared to his previous forecast at 148.2 billion yuan. He also expects margins to improve. 

Additionally, unlike its U.S. rival Amazon.com Inc. (AMZN), Alibaba faces no major anti-trust attacks that could slow its growth or break it up. As long as the company maintains its positive relationship with Beijing, it is essentially clear from regulatory pressures in its home country. 

Positive tailwinds aside, major risks still face Alibaba, including fears over decelerating economic growth in China and a trade war with the U.S. In the March quarter, Alibaba posted revenue up 51%, which despite beating expectations, was its second slowest pace of sales growth in at least three years. 

All eyes will be on Alibaba next month as it gears up to post its quarterly results. Investors will be looking out for any insight into comments on trade tensions, as well as any slowdown in revenues or earnings, which are widely watched as an indicator of consumer and business sentiment in China. If the company cannot prove that a boost in spending by China’s middle class can offset jitters about a slowing economy, its share price may suffer.