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Will Alibaba Group (BABA) Beat Earnings Estimates in Q1?

We expect Alibaba Group BABA to beat expectations when it reports fiscal first-quarter 2017 results on Aug 17.

The Chinese e-commerce goliath caters mainly to its native market. It operates as a platform for third-party sellers. It neither sells goods directly to merchants nor holds inventory.

Last quarter, the company missed estimates, resulting in a negative earnings surprise of 17.02%.

However, its surprise history has been impressive as it topped estimates in three of the last four quarters at an average beat of over 20.53%. Year to date, the stock has rallied 72.8%, significantly outperforming the industry’s gain of 44%.

Why a Likely Positive Surprise?

Our proven model shows that Alibaba Group is likely to beat on earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Alibaba has the right combination of two key components.

Zacks ESPEarnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +4.11%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Alibaba Group has a Zacks Rank #2, which when combined with an ESP of +4.11% make us reasonably confident of a positive surprise.

We caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Alibaba Group Holding Limited Price, Consensus and EPS Surprise

What is Driving the Better-than-Expected Earnings?

Alibaba has a huge (nearly 80%) share of the Chinese e-commerce market, one of the largest markets globally, and a market where consumers are increasingly turning to online channels to purchase quality products and global brands. China is Alibaba’s greatest strength and serving the Chinese customer is what has taken the company to the top. The company has been witnessing top-line growth of more than 40% for the past several quarters.

But Alibaba isn’t resting on its laurels. This is because it isn’t just China but also other Asian markets that will see a rise in online shoppers. This has prompted it to invest in Lazada, a Singapore-based e-commerce company founded by Germany-based Rocket Internet. India is another big e-commerce market with several local players. Alibaba has bought stakes in these players, possibly preparing the road for a full-blown entry.

Having been around long enough to establish logistical relationships through Cainiao, payments processing through Ant Financial and a solid core commerce model, Alibaba has been guzzling data that it is in an increasingly better position to use for improving customer experience and feeding its AI initiatives.

Ant Financial, which runs Alipay, has a total of 450 million active users and processes 170 million transactions per day. Alicloud, which grew 103% in the last quarter, is also seeing enhancements. Alibaba is in the process of negotiations with ZTE for the purchase of its telecom gear-making subsidiary ZTEsoft Technology Co.

All these factors are likely to have played a role in the very strong revenue targets management set for the year. Accordingly, management expects that e-commerce, cloud, digital media and entertainment, and of course international expansion will contribute to revenue growth of around 45-49%, or over $34 billion this year.

Other Stocks to Consider

Here are some stocks, which you may also want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Advanced Micro Devices AMD with an Earnings ESP of +20.00% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Broadcom Limited AVGO with an Earnings ESP of +2.57% and a Zacks Rank #2.

CACI International CACI with an Earnings ESP of +1.83% and a Zacks Rank #2.

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