Chinese e-commerce and internet giant Alibaba (NYSE:BABA) is in troubled waters, at least that’s what one can infer by looking at its stock chart.
For background, Alibaba stock lost more than 50% of its value over the past year.
Alibaba’s underperformance can be attributed to multiple factors. China’s consumption is growing at a slower pace, impacting its overall retail sales. Meanwhile, heightened competitive activity has affected Alibaba's core commerce business.
Besides economic and competitive headwinds, the Chinese government’s increased scrutiny over its tech giants has added to Alibaba’s pain.
What Lies Ahead?Alibaba stock has negative indicators from investors as well as hedge funds. TipRanks’ Stock Investors tool shows that investors who hold portfolios on TipRanks continue to dump Alibaba stock. The data reveals that about 5.8% of these investors reduced their exposure to Alibaba stock over the past month.
Along with investors, hedge fund managers have been offloading Alibaba stock. TipRanks’ Hedge Fund Trading Activity tool shows hedge funds lowered their holdings by 1.1 million shares in the last three months.
Nevertheless, Alibaba continues to invest heavily in growth initiatives, which is encouraging, although it could put pressure on margins in the short term. During the last quarter’s conference call, CEO Daniel Zhang stated that Alibaba's core commerce business is benefitting from its investments, which are driving user growth and logistic capabilities.
Zhang added that Alibaba’s investments in globalization have also driven its revenue growth and user-base consumption.
It is worth noting that Alibaba’s annual active consumers reached 1.24 billion, up 62 million sequentially.
Looking ahead, Needham analyst Vincent Yu expects Alibaba to add new members from lower-tier cities and gradually increase the market share. However, Yu expects aggressive competitive activity could pressure margins.
Yu has a Buy rating on Alibaba stock. However, he lowered his earnings projection for FY22 and FY23 and cut the price target to $230 from $330, citing competition and a weak macro environment.
Wall Street’s TakeOn TipRanks, Alibaba stock has received 21 Buy and 2 Hold recommendations for a Strong Buy consensus rating. Meanwhile, the average Alibaba price target of $208.29 implies 64.6% upside potential to current levels.
Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
Alibaba Group (BABA) is a leading Chinese multinational company that focuses on e-commerce, internet, retail, and technology. The company offers business-to-consumer, consumer-to-consumer, and business-to-business sales services through web portals. In addition, it provides shopping search engines, cloud computing services, and e-payment services.
I am bullish on Alibaba Group because its strong growth momentum, significant competitive advantages, and implied upside potential outweigh the significant risks to the investment thesis. (See Analysts’ Top Stocks on TipRanks)
StrengthsAlibaba owns and operates a diverse portfolio of companies related to various business sectors worldwide. The company is one of the world’s top 10 most valuable companies and was named the thirty-first largest public company on the 2020 Forbes Global 2000 list.
In 2018, the company was the second Asian company to exceed the $500 billion valuation mark, second only to the media company Tencent (TCEHY). In 2020, Alibaba had the 6th highest brand valuation and was also ranked as the fifth-largest AI company in the world. The company is also expanding its footprint in the media industry. Furthermore, it set a record during China’s Singles Day with over $84 billion in gross merchandise volume.
Recent ResultsIn its most recent quarter ended September 2021, Alibaba reported revenue of $31.15 billion, showing an increase of 29.4% year-over-year. Its quarterly earnings missed analysts’ consensus estimates, and adjusted earnings amounted to $1.75 per share, seeing a reduction of 37.7% year-over-year. This is the first decline in the past four years for Alibaba, which is attributed to slowing economic growth in China and Beijing’s crackdown on big tech companies.
Alibaba’s annual active Chinese customers were above estimates, totaling 953 million, showing an increase of 25.9%. More engaged customers mean more people became aware of the company’s entertainment and cloud businesses, which the company predicts will lead its growth in the near future.
The company saw revenue growth of 33.1% in its cloud segment compared to the previous year’s quarter. In addition, its entertainment segment also saw revenue growth of 0.2% on a year-over-year basis.
The company gave its full-year guidance for Fiscal Year 2022 and expects its revenue to grow in the range of 20% to 23% on a year-over-year basis.
Valuation MetricsAlibaba stock looks significantly undervalued at current levels. Its forward enterprise value-to-EBITDA multiple is currently 11x, which is way below its five-year average of 20.5x.
Furthermore, its forward price-to-normalized earnings ratio is 13.7x, which is also much below its five-year average of 26.4x. That said, growth is expected to grow by 22.4% in 2022 and 19% in 2023 (see BABA stock charts on TipRanks).
Wall Street’s TakeTurning to Wall Street, Alibaba earns a Strong Buy consensus rating, based on 21 Buys and two Holds assigned in the past three months. Additionally, the average Alibaba price target of $208.29 puts the upside potential at 70.5%.
Summary and ConclusionAlibaba is a leading global e-commerce and technology giant with massive long-term growth potential. That said, there are significant risks involved in the stock. To begin with, Jack Ma has a complicated relationship with the Chinese Communist Party. Furthermore, there are increased Chinese government regulations on large tech companies like Alibaba and soaring geopolitical tensions.
On the other hand, Wall Street analysts and famous investors like Charlie Munger remain overwhelmingly bullish on the stock at current prices. Additionally, the stock trades at a steep discount to its historical valuation multiples. As a result, it might be a good time for investors to consider Alibaba, so long as they keep the significant risks in mind.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >