Alibaba Group Holdings Ltd. reported earnings and revenue that missed Wall Street’s expectations, and the stock turned lower Thursday, despite the China-based e-commerce giant’s attempts to influence how its results were reported.
The company reported net income attributable to ordinary shareholders that fell 41% to 8.69 billion renminbi (RMB), or RMB 3.30 a share, from RMB 14.68 billion, or RMB 5.65 a share, in the same period a year ago. The company said that, in U.S.-dollar terms, net income was the equivalent of $1.31 billion, with earnings per share of 50 cents.
Alibaba provided “Non-GAAP diluted EPS,” which excludes nonrecurring items, and which reporters typically compare with analyst expectations, of RMB 8.04 — equivalent to $1.22 — up from RMB 7.95 a year ago.
The stock /zigman2/quotes/201948298/composite BABA -0.03% shot up as much as 4.9% soon after the open, before reversing course to close down 3.2%, with some news services having reported that Alibaba had beaten earnings expectations, even though typical earnings-reporting methods would suggest it did not.
A representative of the company contacted MarketWatch on Thursday morning, explaining why EPS in renminbi terms, rather than in dollar terms, should be compared with analyst estimates.
The spokesperson’s contention was that, since Alibaba and FactSet convert their respective numbers to U.S. dollars using exchange rates taken at different times, comparing the U.S. dollar equivalents would be like comparing apples and oranges. MarketWatch always compares company results with analyst consensus estimates compiled by FactSet.
The Securities and Exchange Commission doesn’t provide a standard guide for earnings releases with regard to earnings in a home currency versus the U.S. dollar. Other companies that report in two currencies include Petrochina Co. Ltd. /zigman2/quotes/205108732/composite PTR -1.18% , BP PLC /zigman2/quotes/207305210/composite BP -2.86% and Brazil’s Petrobras /zigman2/quotes/208393974/delayed BR:PETR3 +0.08% .
Ironically, the FactSet consensus for non-GAAP EPS in U.S. dollar terms was $1.21, meaning Alibaba would have beaten, but the EPS consensus in renminbi terms was 8.28, which means Alibaba missed expectations.
Alibaba also contacted FactSet to make it aware of the exchange-rate discrepancies, a FactSet representative confirmed. In FactSet’s “surprise history” page, in which FactSet converts the results in an effort to compare apples to apples, the non-GAAP EPS reported by Alibaba was listed as $1.17, which missed the mean analyst estimate of $1.21.
Some news sources reported that Alibaba beat earnings expectations — and it did, if you compare the net EPS numbers to analysts’ GAAP estimates; the FactSet GAAP EPS consensus was RMB 2.42, or 35 cents on a dollar basis. However, earnings reports rarely compare net EPS with analysts’ GAAP estimates when non-GAAP numbers are available, so it’s curious that some publications and news services chose to do so this time around.
The reason non-GAAP numbers are usually compared with analyst estimates is that the majority of companies that provide guidance give non-GAAP guidance, so that’s what analysts have to work with to provide estimates.
In 2017, of the 340 components of the S&P 500 that provided guidance, 277 provided non-GAAP guidance and 220 provided GAAP guidance, according to a report by Audit Analytics. Of those totals, 120 companies gave only non-GAAP guidance, while 63 companies gave only GAAP guidance, the report said.
In Alibaba’s case, 24 analysts provided non-GAAP EPS estimates in renminbi, and 17 analysts provided GAAP EPS estimates.