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Stocks  | February 13, 2020

Alibaba (NYSE:BABA) reports fiscal third quarter earnings Thursday morning. The actual results from Q3 won’t drive much, if any, of the post-earnings headlines.

From a broad standpoint, of course, there’s the sense that corporate profits and the price of Alibaba stock aren’t quite as important as they might be at another time. With the coronavirus from China still spreading, and the death toll in China — Alibaba’s home country — now over 1,100, financial matters are on the back burner.

But even for investors, whether or not Alibaba earnings “beat” consensus is of minor concern right now. What matters is the outlook going forward.

And so it’s likely the Alibaba conference call on Thursday morning will drive not just Alibaba stock, but the entire Chinese market. Not just investors, but citizens, are looking for an update on how Chinese consumers are reacting to the spread of the virus. There isn’t a better company in the world to provide that update than Alibaba.

The Numbers

In terms of the third quarter numbers themselves, Alibaba simply has to beat current Wall Street estimates. Alibaba stock has held up reasonably well despite pandemic fears, actually gaining 2.4% year-to-date and dipping only 6% from an early January (and all-time) high. As with the market as a whole, investors are staying patient, focusing on the long-term while hoping for short-term progress in containing or curing the new virus from China.

But a headline “miss” in Q3 no doubt would shake that patience. With current Wall Street consensus modeling in a 23% increase in earnings per share and 31% revenue growth, expectations seem reasonably high. But in the last two quarters, Alibaba posted significantly higher top-line growth — 39% and 37% after Q1 and Q2, respectively — while crushing analyst profit estimates each time.

So Alibaba should be able to top expectations, particularly since the new virus had no effect on spending in the quarter (which ended Dec. 31). But, again, it has to. Investors are reacting well to pandemic fears. Decelerating growth, however, would be a different story.

The Conference Call

Assuming Alibaba beats Street estimates, as is likely, the focus then turns to the fiscal fourth quarter and the rest of calendar 2020. And at least relative to analyst expectations, there does appear to be some room for disappointment.

Published Wall Street estimates simply haven’t moved that much. The consensus earnings-per-share estimate, for instance, has dropped only from $1.38 to $1.33. Movement on the top line has been similarly slow.

Of course, given Alibaba’s e-commerce dominance, there’s at least a possibility that the coronavirus could be helping revenue in January and February. With stores and factories closed and many Chinese citizens staying indoors, e-commerce demand could be picking up. And so investors in online rivals Pinduoduo (NASDAQ:PDD) and (NASDAQ:JD) will be watching Alibaba’s commentary closely.

But that commentary could have a much, much broader reach.

The Worst-Case Scenario

The core worry here is what happens if Alibaba discloses that its sales so far in Q4 have taken a big hit. Such a disclosure could echo literally around the world.

After all, in China, brick-and-mortar retail sales have no doubt plunged. Industrial activity ceased for several days, and may not ramp up any time soon. The country’s economy is already struggling with effects from the trade war. If consumers are pulling back, too, the obvious worry is that China is on the brink of a recession — or worse.

And the world right now may not be able to manage a Chinese recession. Global growth outside the U.S. remains weak, even in developing markets like India. Even U.S. gross domestic product growth has slowed.

And yet U.S. stocks still sit at all-time highs. Seemingly little risk is priced in. Alibaba earnings have at least the possibility of raising that risk — and impacting U.S. equities as well. The likes of Apple (NASDAQ:AAPL) and Starbucks (NASDAQ:SBUX) have held up despite significant exposure to China. But that may not last.

More broadly, if Alibaba sounds the alarm, investors around the world are going to listen.

Beyond Alibaba Stock

Again, that’s the worst-case scenario, not necessarily the most likely outcome. But the broader risk here comes from the fact that the worst-case scenario is not priced in. It’s not priced into the stock, nor necessarily into Chinese equities: the iShares MSCI China ETF (NASDAQ:MCHI) is actually positive YTD, having rallied 8.5% in a little over seven trading sessions. It’s certainly not priced into U.S. stocks, which continue to rally.

For Alibaba stock itself, a solid Q3 report and a reasonably optimistic outlook should be enough. For the rest of the global equity market, disaster simply needs to be avoided.

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