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Alibaba Group Holding Ltd. is set to face a critical moment in its earnings report this Thursday, following a massive rally driven by enthusiasm over its artificial intelligence model, a meeting between co-founder Jack Ma and Chinese officials, and a partnership with Apple Inc. The stock has surged nearly 60% since January, adding over $110 billion in market value. However, concerns over intense competition and China’s economic struggles remain.

Options traders are expecting a larger-than-usual stock movement post-earnings, with shares trading well above analyst price targets and at their highest earnings multiple in two years. Investors will closely watch the cloud business, where analysts forecast 9.7% revenue growth for the latest quarter, up from 7% in the prior period.

Daily options volume has surged to over 180,000 contracts in the five days leading up to the earnings call, signaling that investors anticipate a 6.1% stock move, higher than the typical 4.8% fluctuation seen after the last eight earnings reports. During the call, investors will be looking for insights into Alibaba’s ability to maintain its position in the AI space, especially with the growing competition from companies like Baidu, Tencent, and Huawei.

Despite Alibaba's strong position in AI, particularly with Alibaba Cloud, challenges remain in terms of execution, regulation, and market adoption. HSBC analyst Charlene Liu emphasized that fundamentals will need to refocus for sustained stock growth, particularly through stabilizing e-commerce market share and monetizing AI to boost cloud revenue growth.

The surge in stock price, fueled by AI excitement, has pushed Alibaba’s valuation to over 13 times estimated forward earnings, a significant jump from less than 9 times last month. Some analysts, like Xiadong Bao from Edmond de Rothschild Asset Management, suggest that if Alibaba continues to expand its AI narrative, its valuation could reach the five-year average of 15 times forward earnings. However, this rally faces challenges, such as potential government stimulus measures and the imposition of US tariffs.

Market expectations are high following negative reactions to Baidu’s earnings, where investors focused on weaknesses in its core search business despite growth in its AI cloud sector. Alibaba’s earnings will likely be scrutinized for signals on how well it can leverage AI demand while navigating the challenges posed by pricing competition with other hyperscalers and e-commerce rivals.

Analysts predict Alibaba’s sales grew 6.5% for the quarter ending in December, an increase over both the prior quarter and year-ago period. The consensus also expects a net adjusted profit margin of 16.6%, up from 13.2% in the previous quarter.

Paraphrasing text from "Bloomberg"all rights reserved by the original author