Alibaba is set to announce its second-quarter financial results for the 2022 fiscal year on Thursday. The company’s shares have been on a rollercoaster ride this year as the retail behemoth was caught in the middle of a major crackdown on multiple sectors of the Chinese economy. However, the firm is anticipated to post solid financial figures due to its strong e-commerce performance, which is expected to remain strong. The consensus recommendation from Refinitiv analysts is ‘buy’.

Can Alibaba navigate through macro and regulatory risks?

China is experiencing several macroeconomic risks, including the Evergrande debt crisis, slowing economic growth, and consumers turning more defensive lately. Although all the aforementioned factors pose a threat to the firm’s general performance, the recent softness in consumption might directly impact Alibaba considering that e-commerce is the driving force behind the firm’s revenue.

To make matters worse, major Chinese tech stocks took a hard hit after the Chinese government decided to strengthen regulatory oversight and force enterprises to consider China's social interests as part of their business strategies. The crackdown started with financial service providers but quickly spread to e-commerce companies and tech firms, such as Alibaba. Moreover, Chinese regulators have already fined Alibaba $2.5 billion as a result of an antitrust investigation, damaging both the firm’s reputation and financials.

In this uncertain environment, Alibaba's stock has started to give up ground, as investors have been considering the range of surfacing risks. The e-commerce giant may be able to escape the ongoing selling pressure in the Chinese market if it plays an impressive earnings card on Thursday.

Soaring e-commerce business boosts revenue; investments reduce earnings

Mixed financial figures are expected for Alibaba. Revenue is expected to rise as the core commerce business increased in the last quarter. However, earnings are expected to take a substantial hit as the company started to rely more on lower-margin retail businesses during the year and made several new investments to diversify its risks and boost growth. For instance, Alibaba has announced that it will develop an advanced server chip that offers extremely high speed and has the potential to significantly improve the firm’s cloud services.

The retail giant is expected to post revenue of $204.97 billion for the second quarter of the 2022 fiscal year, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year growth of 32.2%. Earnings per share (EPS) are estimated to fall to $12.43, representing a decrease of 30.85% on an annual basis and a 25% decrease versus the previous quarter. Net income is forecast to decline by 34.56% to $32.27 billion.

Undervalued relative to competitors

Although Alibaba realized huge gains after the Covid-19 pandemic outbreak, currently the company is facing tough challenges due to the current uncertain outlook of the Chinese economy. The firm is currently undervalued with a trailing 12-month price to earnings (P/E) ratio of 18.1 (as of November 2, 2021), which is lower than its sector’s median of 19.7. Moreover, its forward 12-month P/E ratio is currently at 17, with most of its major competitors reporting a higher figure. Therefore, these indications might suggest that markets are pricing in low growth prospects for the firm.

 Can the negative long-term trend reverse?

Taking a technical look at Alibaba, a negative long-term outlook can be observed as the share price has been losing ground since the beginning of 2021. However, the short-term picture seems cautiously positive, as the price has recently surpassed its 50-day simple moving average (SMA) for the first time since mid-July.

Nevertheless, a significantly positive surprise in the earnings announcement is needed to turn the short-term picture to bullish. In this case, stronger-than-expected results could send the stock price to test its recent resistance barrier of $182. If buying interest intensifies further, then the next obstacle could be met at $203. On the other hand, if earnings disappoint, initial support may be found near the $151 region, where a violation would turn the focus towards the recent low of $138.5.

Overall, analysts are holding on to their bullish views of Alibaba stock, as the company remains fundamentally robust, and its core operating segments continue to grow at impressive rates. However, there are a couple of risks that can potentially overshadow Alibaba’s growth prospects, such as the continuing regulatory crackdowns and the huge Chinese macroeconomic risks.