Ms. Alibaba’s earnings and revenue space is underselling these ETFs

Chinese e-commerce giant Alibaba Group BABA yesterday released its first-quarter fiscal 2019 results ahead of the opening bell, in which it beat expectations for both earnings and revenue.

Earnings of $1.22 per ADS were seven cents below the Zacks Consensus Estimate. Revenue rose 61% year-over-year to $12.22 billion, less than the $12.25 billion estimate. The solid revenue growth was attributed to a booming core e-commerce business, rapidly expanding cloud computing services and strong media and entertainment growth.

Core e-commerce revenues grew 61% year over year, cloud computing revenues grew 93%, and digital media and entertainment revenues grew 46%. The number of monthly active mobile phone users in China’s retail markets increased by 2.7% year-on-year to 634 million, while the number of annual active buyers totaled 576 million, up 4.1% year-on-year (see all technology ETFs here).

While revenue growth has accelerated, heavy spending in new core online retail businesses, including investments in supermarkets and stores, as well as new artificial intelligence and cloud computing businesses, is hurting profit margins. China’s largest e-commerce company warned that profits would continue to be impacted by investment in new businesses, partly due to Koubei’s consolidation and expenses related to its newly established local services unit. Alibaba has formed a holding company for its food delivery platform Ele.me and food and lifestyle services company Koubei, to which it has received more than $3 billion in new investment commitments.

Impact on the market

After this defeat, BABA shares fell 3.2% on the day. The company’s shares have been hit hard in recent months by a broader sell-off in Chinese shares on concerns about the impact of the U.S.-China trade war and an economic slowdown. The problems are likely to persist given the stock has a Zacks Rank #5 (Strong Sell) and a VGM Score of D. Moreover, it is among the lowest Zacks Industry Score (27% Bottom).

Given this, investors may want to avoid Alibaba for now. However, risk-tolerant investors could take advantage of depressed prices with lower risk in the form of ETFs. For them, we have highlighted six ETFs with the highest allocation to the Chinese e-commerce giant.

Invesco BLDRS Emerging Markets 50 ADR Index Fund ADRE

The product offers exposure to 50 depositary receipts from emerging markets by tracking the BNY Mellon Emerging Markets 50 ADR index. About 45.3% of the portfolio went to Chinese companies, with Alibaba taking the lead with 17.8%. Taiwan, Brazil and India round out the next three spots in terms of country exposure. From a sector perspective, information technology accounts for 43.9%, followed by finance (15.8%), telecommunications services (10.4%) and materials (9.2%). ADRE accumulated its asset base of $150.8 million by trading a small volume of approximately 11,000 shares. It charges 18 basis points a year and has lost 1.6% on the day. ADRE has a Zacks Rank #3 ETF with a medium-risk outlook (read: EM ETFs Rebound in July: Value Trap or Value Play?).

Invesco BLDRS Asia 50 ADR ADRA Index Fund

This ETF follows the cap-weighted BNY Mellon Asia 50 ADR Index and tracks the performance of around 50 DR in the Asian market. Chinese companies have the largest market share, amounting to 34.8%, and Alibaba is in first place with an allocation of 12.8%. Japanese companies hold 32.1% of assets. ADRA is often overlooked by investors, as evidenced by its AUM of $21.3 million and average daily volume of around 1,000 shares. It charges 30 basis points in annual fees and lost 0.4% the day after the BABA results. The fund carries a Zacks ETF Rank 3 (Hold) with a medium-risk outlook.

iShares MSCI China ETF MCHI

This ETF tracks the MSCI China Index, which has 289 securities. Of these, Alibaba ranks second with a share of 12.7%. From a sector perspective, approximately 38.3% of the portfolio is dedicated to information technology, followed by financials (21.9%) and consumer goods (8.8%). The fund has amassed an asset base of $3.4 billion, charging annual fees of 62 basis points. Volume is also solid, with an average of almost 3.5 million shares traded daily. Following the results, the ETF lost 1.8% and sits at a Zacks ETF Rank of #2 (Buy) with a medium-risk outlook (read: China ETFs: Buy the Dip?).

SPDR S&P China ETF GXC

This product is aligned with the S&P China BMI Index, which charges investors a fee of 59 basis points per annum. It has 377 shares in its basket, and the second place is taken by Alibaba with 11.83%. From a sector perspective, information technologies have the largest share – 35.8%, followed by finance and consumer goods. The ETF has accumulated $1.1 billion in its asset base and has average daily volume of 62,000 shares. Following the results, Alibaba fell 1.7% and has a Zacks Rank #2 ETF with a medium-risk outlook.

Invesco China Technology ETF CQQQ

This fund targets the entire technology sector in China and tracks the AlphaShares China Technology Index. With 74 shares, Alibaba ranks second in the basket with a 9.6% share. The product manages an asset base of $362.9 million, trading a good volume of approximately 119,000 shares per day. The expense ratio is 0.70%. CQQQ fell 2% on the day following Alibaba’s results and is a Zacks Rank #3 ETF with a high-risk outlook.

KraneShares CSI China Internet Fund KWEB

This product provides focused exposure to the Chinese internet market by tracking the CSI China Overseas Internet Index. In total, the fund has 46 securities in its basket, followed by Alibaba with a share of 9.3%. The technology sector accounts for a significant 63.6% of total assets, while consumer discretionary has a 29.5% share. The ETF has an AUM of $1.2 billion and charges investors annual fees of 72 basis points. Volume is solid with approximately 722,000 shares traded daily. KWEB fell 2.3% in the last trading session following Alibaba’s earnings announcement and is currently a Zacks Rank #3 ETF with a high-risk outlook.

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Alibaba Group Holding Limited (BABA): Free Stock Analysis Report

GUGG-CHINA TEC (CQQQ): ETF Research Reports

ISHARS-MS CH IF (MCHI): ETF Research Reports

BLDRS ASIA 50 (ADRA): ETF Research Reports

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BLDRS-EMER MKTS (ADRE): ETF Research Reports

KRANS-C CHN INT (KWEB): ETF Research Reports

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