Monday, February 17, 2020

Coronavirus May Become a “Black Swan” for Alibaba

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What’s happening: Although the deadly coronavirus is negatively impacting Alibaba’s core ecommerce operations, some analysts believe the virus outbreak has a silver lining for the company.

What happened: Alibaba topped expectations when it reported results for the fiscal third quarter late last week. While warning of the coronavirus impacting revenue growth in the current quarter, Alibaba’s CEO said that the outbreak could become a “black swan” event, or an event that has an impact that is contrary to what most people expect.

  • Alibaba announced 36% year-over year growth in its quarterly revenue to $23.2 billion, topping analyst expectations of $22.8 billion. The growth was driven by record Single’s Day sales.
  • The company’s adjusted earnings grew 47% to $2.61 per share, ahead of the consensus estimate of $2.28 a share.

Why it matters: Not only did the Chinese ecommerce giant report phenomenal growth for the fiscal third quarter, revenues from its cloud business exceeded RMB10 billion for the first time. More importantly, active consumers on Alibaba's China retail marketplaces grew to 711 million, up 18 million from the previous quarter. Active users on mobile devices rose to 824 million, up 39 million from the previous quarter.

The Black Swan: The Chinese government has been encouraging people to shop online as quarantine measures to prevent the virus from spreading keeps millions under lockdown. The coronavirus outbreak is, therefore, promoting more online shopping for groceries and other necessities, which is positive for Alibaba’s core ecommerce business. In fact, Alibaba’s Freshippo supermarket has seen a significant rise in online ordering of groceries, fresh goods and daily necessities.

Moreover, the Chinese government’s orders to allow people to work from home could also propel the country’s digital transformation, a positive for Alibaba’s cloud business.

Management hinted that the lockdown brought on by the outbreak could result in long-term behavioral changes among Chinese consumers and businesses. The trends of consumers placing online orders and employees working from home could continue to boost Alibaba’s businesses in the long term.

During this challenging period for China, Alibaba has been aggressively procuring medical supplies from other countries and has donated more than 40 million units to affected cities. Analysts believe that the company is looking to identify new opportunities where it can add value and will then incorporate these in its business model going ahead.

How shares have responded so far: Although Alibaba’s share price has climbed 20% over the past three months, it has declined by around 5% in the past month. The pressure on the company’s stock has been driven mostly by coronavirus fears. Many analysts consider this as a buy-the-dip opportunity for a promising growth stock.

 

The Markets Today

     

Investors will be watching Japanese stocks today, amid renewed coronavirus fears, after the country reported weak economic growth data for the fourth quarter. More economic releases are due later in the day.​

Context: Japan’s shares closed lower on Friday and opened on a downbeat note today. The economic impact of the coronavirus pushed demand higher for the “safe-haven” yen. Japan has reported various infections from the coronavirus and is one of the worst affected countries after mainland China.

Details: The Japanese Nikkei closed around 0.6% lower in Friday’s trading, as the country reported its first death from the flu-like virus on the previous day. The index also opened lower in today’s trading session, following data showing that the country’s economy had contracted the most since the second quarter of 2014. Japan’s GDP fell 1.6% in the fourth quarter, following a revised 0.1% growth in the third quarter.

In its latest update, China's health commission reported 105 additional deaths and 2,048 new cases on Sunday, bringing the total case count to 70,548 globally. Analysts expect investors to stay away from Asian stocks for the time being and focus on the US stock market. Weakness in Japanese stocks will boost demand for the yen due to its “safe haven” status.

Shares of air transportation, iron & steel and metal products were the worst performers on the Tokyo Stock Exchange on Monday. The US dollar was trading at 109.77 yen, versus 109.72 yen in New York trading.

On Friday, Nissan Motor’s shares lost around 10%, reaching its lowest level in ten and a half years, after the company lowered its annual operating profit outlook by 43% due to a downturn in vehicle sales. Shares of SUMCO Corp and Toshiba Corp bucked the overall market weakness, posting a rise of around 7% and 2.5%, respectively.

Why it matters: Market sentiment was again dented by weaker-than-expected GDP data for the October to December quarter. After a weak performance by Japanese stocks in Friday’s session followed by a lower opening today and with US markets remaining closed for President’s Day, all eyes are on further economic releases scheduled for release today. Industrial production data is likely to provide some relief to investors.

What to watch: Japan’s industrial production is expected to rise 1.3% in December, after falling 1% in the previous month. Capacity utilization in Japan is projected to show 0.2% growth in December, after declining 0.3% in November.

Other Markets: US indices closed mixed on Friday, with the Dow falling 0.09%, the S&P 500 rising 0.18% and the Nasdaq gaining 0.20%.

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Futures at 0400 (GMT)

News shaping
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What else to watch today

     

Saudi Arabia’s inflation rate, Russian industrial production, China’s foreign direct investment and outstanding yuan loan growth and speech from European Central Bank’s Philip Lane.