What you need to know

Alibaba (BABA) is one of the most followed stocks by Zacks.com visitors lately, so it might be a good idea to check out some of the factors that could affect the stock’s near-term performance.

Shares of this online retailer have returned 10.2% over the past month versus a change of 1.7% for the Zacks S&P 500 Composite. The Zacks Internet – Commerce industry, which includes Alibaba, has gained 8.7% during this period. The key question now is: where could the stock go in the near future?

While press releases or rumors about a significant change in a company's business outlook usually cause the stock to “trend” and result in an immediate price change, there are always some fundamental facts that ultimately determine the buy or hold decision.

Revisions to earnings estimates

Rather than focusing on anything else, we at Zacks primarily evaluate the change in a company's earnings outlook because we believe the fair value of its stock is determined by the present value of its future earnings stream.

We essentially study how sell-side analysts who cover the stock adjust their earnings estimates to reflect the impact of the latest business trends. And when earnings estimates for a company rise, the fair value of its stock increases. A higher fair value than the current market price stimulates investors' interest in buying the stock, leading to an increase in its share price. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

For the current quarter, Alibaba is expected to report earnings of $2.24 per share, representing a year-over-year change of +4.7%. Over the past 30 days, the Zacks Consensus Estimate remained unchanged.

For the current fiscal year, the consensus earnings estimate of $8.68 suggests a change of +0.7% from last year. Over the past 30 days, this estimate remained unchanged.

For the coming fiscal year, the consensus earnings estimate of $8.74 represents a change of +0.6% from Alibaba's expected full-year earnings. Last month, the estimate remained unchanged.

Our proprietary stock evaluation tool, the Zacks Rank, has a strong outside-audited track record and offers a more conclusive picture of a stock's near-term price performance by effectively harnessing the power of earnings estimate revisions. Based on the magnitude of the recent consensus estimate change, as well as three other factors related to earnings estimates, Alibaba is rated a Zacks Rank #3 (Hold).

The story continues

The following chart shows the development of the company's consensus estimate for earnings per share over the next 12 months:

12 months EPS

Sales growth forecast

While earnings growth is arguably the best indicator of a company's financial health, nothing will happen if a company can't grow its revenue. After all, it's nearly impossible for a company to grow its profits over a sustained period of time without increasing its revenue, so it's important to know a company's potential revenue growth.

For Alibaba, the consensus revenue estimate for the current quarter of $33.01 billion implies a change of +7.1% year-over-year. For the current and next fiscal years, estimates of $139.56 billion and $149.6 billion, respectively, suggest changes of +6.9% and +7.2%, respectively.

Latest reported results and surprise history

Alibaba reported revenue of $33.47 billion in the last quarter, a change of +3.7% year-over-year. Earnings per share for the same period are $2.26, compared to $2.40 last year.

Compared to the Zacks Consensus Estimate of $34.95 billion, the reported earnings represent a surprise of -4.23%. The EPS surprise was +2.73%.

Over the past four quarters, Alibaba has beaten consensus earnings per share estimates three times. The company has beaten consensus revenue estimates only once during that period.

Evaluation

No investment decision can be efficient without considering the valuation of a stock. Whether the current price of a stock accurately reflects the intrinsic value of the underlying business and the company's growth prospects is a key factor in its future price performance.

Comparing a company's current valuation multiples, such as the price-to-earnings ratio (P/E), the price-to-sales ratio (P/S) and the price-to-cash-flow ratio (P/CF), with its own historical values ​​helps determine whether the stock is fairly valued, overvalued or undervalued. Comparing the company to comparable companies using these parameters also gives a good sense of the appropriateness of the share price.

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays special attention to both traditional and unconventional value measures to rate stocks from A to F (an A is better than a B; a B is better than a C, etc.), is quite useful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.

Alibaba gets an A grade on this score, meaning it trades at a discount compared to its peers. Click here to see the values ​​of some of the valuation metrics that led to this rating.

Diploma

The facts discussed here and much more information on Zacks.com could help you decide whether the market hype surrounding Alibaba is worth paying attention to. However, its Zacks Rank #3 suggests that the company could perform in line with the broader market in the near future.

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