Why Alibaba is Rallying

The stock of Alibaba Group Holding Ltd. (NYSE: BABA) has been on an upward trend since the opening bell on Wednesday—a day before the Chinese ecommerce giant is scheduled to announce its financial results for the first quarter of fiscal year 2017. The company’s shares are trading higher by more than 2.5 percent during late trading hours. As of 6:21 AM GMT -4 on August 11, the BABA stock is changing hands at $87.33, up by 2.45 percent or 2.09 points.

Although the reason behind this rally is still debated, we believe that the explanation for this is that JD.com Inc. which is considered as the major competitor of the ecommerce corporation reported its financial results for the quarter ending in June on Wednesday. The company posted soaring figures for the quarter, which pushed the stock of JD.com Inc higher to monthly peaks of $24.60. The major focus is still on the ecommerce firm’s profitability and operating metrics.

On a year-over-year basis, the net revenues edged higher by 42 percent to hit RMB65.2 billion in the given period, topping the analysts’ forecast by 0.29 percent. In terms of the online direct sales division, it expanded by 42 percent on a year-over-year basis, while the services and others segment grew by around 67 percent year-over-year.

When it comes to the gross merchandise volume of the company, it edged higher by 47 percent year-over-year to touch RMB160.4 billion during the quarter. Gross merchandise volume, which is exclusive of the virtual items including group buying coupons, prepaid phone and game cards, as well as online travel products, surged by approximately 52 percent on a year-over-year basis to hit RMB157.1 billion.

The annual active customer accounts also rose to 65 percent year-over-year to reach 188.1 million in the past year. The fulfilled orders, excluding virtual items, rallied by 56 percent on a year-over-year basis to clock in at 373.4 million. Meanwhile, the fulfilled orders accomplished through mobile accounted for 79.3 percent of the total amount, and represent growth of over 130 percent year-over-year.

The earnings per share of the ecommerce company also came in as a bigger positive shock for investors, as the bottom-line registered at $0.29—significantly beating the analysts’ estimates of $0.18 loss and the previous year’s $0.01 loss. On the other hand, the operating and gross margins went up by 0.6 percent on a year-over-year basis to 110 basis points and 14.6 percent year-over year to 200 basis points.

This earnings report provided significant insights to market players which are also directly related to the outlook of Alibaba.

One, the macro growth worries in China are not entirely true. Investors have to understand that it is the size of the economy, which actually matters and Alibaba is on the right track here. The gross merchandise volume estimate of Jefferies for the approaching financial result stands at RMB794 billion, and reflects a 17.9 percent growth on a year-over-year basis.

Next, there is still a huge room for further penetration by ecommerce companies in Mainland China. Once again, Alibaba has turned its focus on rural China via its Taobao service centers, where its own penetration is down, with one third of the counties and one-sixth of the villages in comparison to the targets for fiscal year 2020.

At the moment, the quarterly revenue of the Chinese ecommerce titan stands at $30.2 billion, while its estimates for earnings per share comes in at $4.16. For the forthcoming quarterly financial results, the top-line outlook is at $33.1 billion, while the bottom-line outlook posts at $4.56.

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