Event: BABA reports its Sept 2014 qtr earnings tomorrow Nov 4th prior to the market open, and the options market is implying a one day move of about 6.5%.
The Nov 7th weekly 102 straddle with the stock around $102 (long the put and the call) is offered at about $7, so if you bought that you would need a move above $109 or below $95 by Friday’s close to break-even.
Sentiment: In the last week or so, Wall Street analysts have initiated coverage of the stock with near universal enthusiasm as you would expect with 29 Buy Ratings, only 3 Holds and 2 Sells, with an average 12 month price target of about $109, or about 7% higher.
I think it is safe to say that the sentiment is very bullish, not only by analysts but also investors. The stock now appears to be consolidating at the all-time highs heading into next week’s first quarterly report as a public company.
Options Open Interest: Calls dramtically out-number puts 422,000 to 290,000, with calls making up 9 of the top 10 ten strikes, with the Nov 110 calls the single largest strike with 21,000. Today the two most active strikes are 5800 of the Nov 22nd 100 calls and 5000 of the Nov 7th weekly 100 calls, most look like they were bought to open.
Volatility: Since this is BABA’s first earnings report as a public company, options traders are guessing when it comes to how to price the options. 30 day implied volatility has inched up to the mid-40’s in anticipation:
Considering that realized volatility in BABA since its IPO is closer to 30, and considering that BABA’s largest move after a very hot IPO has been about 4%, tomorrow’s 6% implied move for earnings looks to be a bit high in our view. Add to that that it’s a fairly mature company with a massive market cap nearing $250 billion.
Price Action/ Technicals: BABA is up 50% from its Sept 19th IPO, and up 10% from its open on the day of the IPO at $92.70. Instituinal ownsership among probably 50 funds globally own the lionshare of the shares outstanding, and their desire to build a sizeable position in a stock that now has a market cap that would place it in the top ten of the S&P 500 has caused signifigant demand since its IPO.
While there is a little history to go off of, it is clear to see that the stock had a decline of about 12% from its close on Septh19, to the lows on Oct 15th, just a tad deeper than that of the S&P 500, but the bounce since has nearly doubled that of the S&P500, up 23% and making new all time highs as a I write. The consolidation in and around $100 over the last week, which was just above the high from the IPO day could be pyschologically important as the stock looks to establish a new trading range:
OUR VIEW: At this point, it will be interesting to see how the company communicates with US investors and analysts. Specifically, how does management give guidance and what’s the level of transparency on their conference calls. Obviously we will not have a sense for this until after the report, but I think it is important to note that both FB and TWTR shares were punished after the first earnings events following their IPOs. There seemed to be a slight disconnect between what analysts and investors expected to hear, and what they actually heard. That’s despite the fact that there were only slight material changes in their business since their IPO roadshows a few months earlier.
It is my sense that BABA will not disappoint, but could have questions revealed as it relates to growth rates. For a $250 billion market cap stock that is trading at almost 45x 2015 expected earnings, I would say there will be little room for decelerating growth in the story in the months to come.
But to be clear, the Alibaba story is very unique, with 80% consumer e-commerce market share in China that is expected to be $450 billion this year, growing 40% year over year with 50% EBITDA margins. It’s easy to see how the stock trades 35x 2016 expected estimates. But the keyword there is EXPECTED. Who knows what they actually print in 2016.
Remember this is a Chinese company, which has had some issues/questions as far as corporate governance in the past, with a VERY confusing business model. So I don’t expect it to be smooth sailing forever, but minor miscues will likely be overlooked.
Given the stock’s recent strength and the potential unknown following the results, we think it makes sense for traders looking to express a bullish view to define their risk. On Friday we detailed such a trade that we thought offered a very favaorable risk reward, read here: Name That Trade – $BABA: Alibaba and the Forties Vol and discussed the trade on CNBC’s Options Action:
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Expectations: Here is a very concise roundupo from WSJ’s Digits blog:
EARNINGS FORECAST: Analysts have added Alibaba to their coverage lists, and many of them are expecting the company’s stellar growth to continue. On average, analysts surveyed by Thomson Reuters are expecting a net profit of $1.16 billion for the quarter, up 45% from a year earlier.
REVENUE FORECAST: Analysts expect revenue of $2.61 billion, which would be an increase of 45% from a year earlier.
WHAT TO WATCH:
–PROFIT MARGINS: Alibaba’s profit margin, which is higher than that of most industry peers, has narrowed since last year as the company has been spending heavily to expand its e-commerce services through smartphones and tablets. In the quarter ended June, Alibaba’s operating margin fell to 43.4% from 50.3% a year earlier. Observers also are looking for any improvements in Alibaba’s ability to make more money from mobile e-commerce services, which haven’t been as lucrative as those through desktop computers.
–EARNINGS GUIDANCE: Investors expect Alibaba to issue earnings guidance for the first time. They expect strong numbers for the quarter through December, as the period includes the Nov. 11 annual discount day, Alibaba’s biggest shopping event of the year, which last year generated about $5.8 billion in transactions in 24 hours.
–TMALL GROWTH: Alibaba earns the vast majority of its revenue from its two online marketplaces, Taobao and Tmall. Taobao, which hosts millions of small merchants, doesn’t charge commissions on sales but charges for advertising services on the site instead. Tmall, an online shopping mall that hosts major global brands such as Apple, Nike and Burberry, takes a cut from each transaction. Analysts expect Tmall to fuel more of Alibaba’s earnings growth in the coming years, saying that efforts to attract more high-end brands to Tmall will be key.
–COMPETITION FROM TENCENT: Alibaba’s chief Chinese Internet rival, Tencent Holdings is also challenging its dominance. Tencent has been trying to turn its popular mobile-messaging app into a platform for many different services including online shopping. While Alibaba still accounts for most mobile e-commerce in China by far, Tencent could emerge as a threat if it figures out ways to seamlessly link social networks with e-commerce, analysts say.