Alibaba Earnings Preview: With China in danger of recession, all eyes on Thursday's BABA earnings for clues

Alibaba (BABA stock) dropped 5.5% to $82.47 on Tuesday along with the broad downturn in growth stocks. The Nasdaq dropped 2.4% despite clawing back substantial ground as it spent the early part of the session down more than 3.3%. That was not BABA's only reason for decline however. An official with the Securities & Exchange Commission (SEC) said "significant issues remain" regarding getting access to Chinese companies' audits. 

The focus on Wednesday now turns to Thursday's Alibaba earnings report for the fourth fiscal quarter ending in March. Due to its popularity as China's largest online retailer, Alibaba's earnings are seen as a proxy for the Chinese economy. With that economy showing cracks of late, even more observers will tune in for the results.

Alibaba Stock News: SEC audit drama continues

Y.J. Fischer, director of the Office of International Affairs at the SEC, said that the Public Company Accounting Oversight Board still needs access to audits from many Chinese firms listed in the US despite Chinese government claims that they are relenting on holding these audits back. Many Chinese firms have been given three years to produce such financial audits, but many continue to claim Chinese law forbids it on the grounds of national security. Fischer called the seriousness of these excuses "questionable at best."

Though Fischer admitted that "productive discussions" with Chinese authorities had taken place, the official's general lack of confidence in a successful handover of audits lent more anxiety to an already worried market. If audits are not handed over within three years, then these stocks will be delisted. Both JD.com (JD) and Baidu (BIDU) saw their share prices rocked by the news. It was only two weeks ago when JP Morgan raised its price target on BABA to $130, saying "Significant uncertainties facing the sector should begin to abate on the back of recent regulatory announcements." Yet the uncertainties regarding audits appear stubborn and unlikely to disappear anytime soon.

As for Thursday's earnings, BABA has faced 13 earnings per share (EPS) downgrades on the quarter over the past 90 days. This is typically a sign that an earnings miss is fairly likely. China has after all been under covid lockdowns, but most of the major lockdowns came into effect in April after the January-March quarter was in the bag. Some lockdowns may have affected March sales though. Several weeks back, China released April retail sales figures that retracted 11.1% YoY, nearly double the forecast, and the data showed that industrial production had dropped 2.9%. Though it may not have a huge effect prior to April, the market will watch for how this data coincides with Alibaba's outlook for the second half of the year and the present quarter.

Wall Street expects BABA to report $1.08 in adjusted EPS on $29.6 billion in revenue. Colin Sebastian, of Baird, said in a note that “management’s tone could remain cautious with respect to near-term growth and margins.” He expects management to trim the current quarter's revenue outook by about $2 billion.

BABA key statistics

Alibaba Stock Forecast: Sentiment needs to change before a rally is in order

Nothing to see. Move along.

All kidding aside, it is definitely possible to see an earnings blowout leading to a BABA stock strong rally on Thursday. We at FXStreet view that possibility as less than likely however. That is because with covid lockdowns likely to stretch into June, a further deterioration in Chinese economic data seems likely. This should lead management to strike a clearly cautious tone at least. The other possibility is that of lowering expectations for the next several quarters.

If there is any negativity whatsoever, investors should expect another downdraft to $78. This price has stood up the share price before. We view BABA skeptically until it overpowers $90. That brings it to neutral in the short term. Above $94, BABA stock would look a bit more attractive as a target. The Relative Strength Index (RSI) reading at 39 leads us to believe instead that BABA has more room to bottom.

BABA 4-hour chart

The author owns shares of Alibaba.