One recurrent headline appearing on financial news boards fairly regularly over the past few months goes pretty much like this: Why are shares of “insert Chinese tech/education/internet company here” falling?
The answer most of the time is due to a crackdown on… everything? Of course, amongst those nursing wounds from the tightened Chinese regulatory environment is Alibaba (BABA). As a result, shares of the ecommerce giant have been on a downward spiral for most of the year; the stock has shed an alarming 36% of its value year-to-date.
Perceived wisdom would say now might be the time to load up on shares of this internet giant. J.P. Morgan’s Alex Yao thinks so but his recommendation comes with caveats.
“We turn more cautious on Alibaba’s domestic ecommerce growth outlook in the coming quarters,” the analyst wrote. “Single-digit percentage YoY growth for domestic ecommerce GMV and revenue will become a new norm in the next few quarters, in our view, as we think regulation changes in a wide range of industries (e.g. property, education, manufacturing, Internet, healthcare, etc.) will lead to prolonged consumption weakness.”
As 84% of China’s internet users are Alibaba consumers, while 29% of China’s average resident disposable income is spent on the platform, Yao thinks there is “little room for contra-cyclicality in the near term.” Factor in the company’s commitment to heavily invest in certain segments which will “further weigh on near-term margins” and Yao’s FY22/23 adjusted EPS estimates are 17%/18% lower than consensus estimates. More forlornly, Yao doesn’t see “any catalysts for the stock to outperform on a two-quarter view.” Value could be “unlocked” once the regulatory environment stabilizes, but that is likely a “1H22 event.”
That said, the slide has been so violent, that even with the muted outlook, the stock is “undervalued” and worthy of an Overweight (i.e. Buy) rating, according to Yao. More impressively, the analyst gives BABA shares a $255 price target, suggesting room for a 72% uptick over the next 12 months. (To watch Yao’s track record, click here)
Overall, while sentiment has shifted around Alibaba, it still receives overwhelming Street support; based on 24 Buys vs. 2 Holds and 1 Sell, the stock boasts a Strong Buy consensus rating. Meanwhile, the $256.92 average price target is a touch above Yao’s, and suggests one-year returns of a robust 73.5%. (See Alibaba stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.