Alibaba stock has taken a hit from China crackdown, but its earnings could be a different story

Alibaba BABA, -1.19% is no stranger to regulatory action in China, having paid a $2.8 billion antimonopoly fine earlier this year over its treatment of some merchants that wished to sell on other platforms. The company also has a 33% stake in Ant Group Co., the Jack Ma-affiliated financial-technology company that will be subject to government oversight after regulators cracked down on Ant’s sprawling business and put a halt to an initial public offering that was expected to be the biggest in history.

The moves have sparked fears that the Chinese government plans a tougher tack on private companies more generally, which could pose risks for U.S. investors. With this backdrop, Alibaba’s U.S.-listed shares fell 13.9% in July, their worst monthly performance in more than two years.

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“We believe most of these new regulations do not impact Alibaba, though clearly investors are concerned over increased regulatory focus,” Raymond James analyst Aaron Kessler wrote in a note to clients.

The regulatory narrative has dominated lately, but Alibaba can try to draw more focus to its own story when it reports June-quarter earnings Tuesday morning. The results will show how the overall Chinese e-commerce landscape is faring, as well as what progress Alibaba has been making in lower-tier Chinese cities, where it’s been investing heavily to grow its business.

China’s 6.18 shopping festival fell during the quarter, and the company’s commentary about merchant participation left Truist analyst Youssef Squali feeling “encouraged by Alibaba’s strong performance this 6.18 amid an increasingly competitive Chinese e-commerce landscape.”

Strong results in the commerce business could help distract from the regulatory issues that are outside Alibaba’s control, noted Baird analyst Colin Sebastian.

“Regulatory overhang may begin to ease as business fundamentals prove to be largely intact,” he wrote in a note to clients, though he’s taking a measured approach when looking at the most recent quarter. “While the macro environment in China has largely stabilized, retail sales growth has moderated slightly through the quarter and likely limits significant near-term upside.”

What to watch for

Revenue: Analysts tracked by FactSet expect that Alibaba posted RMB209.1 billion in revenue during its fiscal first quarter that ended in June, up from RMB153.8 billion a year earlier. The estimate includes RMB183.6 billion in revenue from the core commerce business.

Earnings: The FactSet consensus calls for RMB14.33 in adjusted earnings per share during the June quarter, down from RMB14.82 a year prior.

Stock movement: Alibaba will be looking to snap a streak with its coming report, as its shares have fallen in the session following its last seven earnings reports. Alibaba shares have lost 23% over the past 12 months as the KraneShares China Internet ETF KWEB, -2.55% has declined 24% and as the S&P 500 SPX, -0.54% has risen 35%.

What else to watch for

Alibaba said in its last earnings release that it planned to invest all of its incremental profits back into the business during this current fiscal year, and investors will be looking for more context on those investments on the coming earnings call.

The company is putting money behind a number of areas, including Taobao Deals, which is targeted at price-conscious consumers, and New Retail, which seeks to merge the online and offline shopping experiences.

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“Considering the importance of these investments and their dilutive effect to overall margins, we believe that additional insight and disclosures around this topic would be positive for the stock in the short and medium term,” Truist’s Squali wrote.

“All that said, we remain encouraged by the company’s willingness to invest against these massive growth opportunities and protect its turf against rising platforms like Meituan 3690, -5.87% and Pinduoduo PDD, -0.53%, which should expand Alibaba’s customer base into China’s lower tier-cities, less affluent shoppers, drive engagement and frequency, and ultimately share of wallet,” he continued.

Another area to watch will be the cloud business. Mizuho analyst James Lee expects revenue for that segment to be in line with the 38% consensus growth forecast, which would “reflect the loss of a major international contract from last quarter.” He notes that the segment is looking to ramp up its sales force.