Is Alibaba (BABA) a Buy Before August 20 Earnings? Cloud Earns 74% of the Profit

TL;DR

• Yes, but half of it. BABA at $123.81 is a buy on the cloud business. Thursday's print is a coin flip with a fat tail, so the second half waits until after it.
• Every named sell-side target sits above the price, from HSBC's $170 to Citi's $192. The lowest of them is 37.3% up from Friday's close. Target walked into its print above the whole panel; Alibaba walks in below all of it.
• Group adjusted EBITA fell 84% last quarter to RMB5,102m, and cloud is 74% of what remains. One segment carries the company.
• The line that decides Thursday is quick commerce, where revenue grew 57% to RMB19,988m and the subsidy war behind it flattened group profit. June is the first full quarter to test management's claim that the subsidy phase is over.
• Options price ±5.7%, roughly $116.75 or $130.87. BABA has cleared its implied move in five of its last eight reports.

The Board

Cheap against what the street expects. Expensive against what the company currently earns.

Is Alibaba (BABA) a Buy Before Earnings?

Alibaba is a buy at $123.81, and I would put half the intended size on before Thursday rather than all of it.

The reason to split it is not caution about the business. It is that the single line which decides the quarter is the one nobody models well. Cloud growth is visible, tracked and roughly known. Quick-commerce losses are a management decision that changes quarter to quarter, and they are what flattened group profit last time.

Why the Panel Sits 37% Above the Price

Four banks published targets on this name in July: Morgan Stanley $180, HSBC $170, Daiwa $175, Citi $192, all rated buy. Those are sell-side twelve-month targets, not mine. Against Friday's $123.81 close the lowest implies 37.3% of upside.

Compare that with the Target setup on Wednesday, where the stock traded through every average target on the street four days before its own print. Here the stock is 35.7% below its 52-week high of $192.67 and 34.7% above the $91.89 low, which puts it nearer the bottom of its own year than the top.

GuruFocus struck the forward P/E at 19.79 on August 3, against a Retail-Cyclical industry median of 15.20. The multiple moves with the price and I have not restated it at Friday's close, so read it as an August mark rather than a live one. Roughly twenty times forward earnings for a group whose cloud segment is compounding at 38% is not the demanding part of this stock.

What Nobody Has a Good Estimate For

Quick commerce. Revenue there grew 57% to RMB19,988m last quarter, and the subsidies that bought that growth are most of the reason group adjusted EBITA fell 84% while cloud EBITA rose 57%.

Management has said the phase of buying share through subsidies is over. The June quarter is the first full period where that is checkable, and I have not seen a consensus estimate for the segment's loss that I would trust. Cloud can grow 38% again and the group profit line still comes in soft if the answer is no.

So the thing I will read first on Thursday is not the revenue beat. Consensus wants about RMB268.9bn, up 8.6% on the RMB247.65bn of a year earlier, and the preview has the full setup. The revenue number is close to knowable. The loss number reflects a choice management made in April and has not yet shown anyone.

Where I'd Buy It

Half at $123.81. The rest under $117.

A full implied move down puts BABA at $116.75, which would still leave it about 39% under its high and roughly $53 below the cheapest named target. Buying the second half there means the quarter has already disappointed and the price has already paid for it. If Thursday goes the other way and the stock opens near $130.87, the first half is working and I have missed a better entry on the rest. I will take that trade-off while the deciding variable is one the market cannot see in advance.

What would change the call: cloud growth decelerating out of the high thirties, or quick-commerce losses widening again after management said they would not. Either one breaks the reason to own it, and neither is priced.

The Options Angle

The market is pricing ±5.7% for Thursday and I think that is light, for reasons specific to this name rather than a view that volatility is generally cheap. BABA has exceeded its implied move in five of its last eight reports, including 10.2% against 5.8% implied in May.

The preview already logs a long straddle and a premium-selling pass on that arithmetic. I am not going to log a third volatility structure on the same event. The row below is the stock call this piece makes, so the scorecard can grade the direction separately from the straddle.

Trade log

#	Stance	Structure	Strikes and expiry	Cost or credit	Spot at writing	Implied move	Conviction	Breakeven
1	Bullish	Long stock, half size now	n/a, no expiry	$123.81 per ADS	$123.81 (Aug 14 close)	±5.7%	7/10	scored against $123.81
2	Scale-in	Long stock, second half	n/a, conditional on a print below $117	not yet struck	$123.81 (Aug 14 close)	±5.7%	6/10	$117 or better

Row 2 is conditional and stays unstruck until the price trades there. The week ahead has Baidu on Tuesday and NetEase alongside Alibaba on Thursday, which makes it a China week as much as a retail one.

The One-Line Read

Alibaba is cheap against what the street expects and expensive against what it currently earns. The cloud business is the reason to own it. Quick commerce decides Thursday, and that number is not visible from outside the company.