Nasdaq BABA Alibaba

A series of positive developments, including favorable commentary from Chinese vice-premier Liu and an upsized share buyback plan, led the ADR (American Depositary Receipt) of Chinese internet giant Alibaba (NYSE:BABA) to bounce back from its recent lows. 

However, it has reversed some of its gains and has fallen about 14.5% over the last 10 trading days. Further, Alibaba stock is down more than 55% over the past year. 

What’s Hurting Alibaba?

The resurgence of the coronavirus, ongoing macro headwinds, and increased competitive activities could hurt Alibaba's near-term financials and limit its upside potential. Further, the current geopolitical environment remains a drag. 

It’s worth noting that China’s GDP growth has decelerated, while consumption is slowing. Further, the recent surge in infections and lockdowns are expected to hurt economic activity in China, and in turn, Alibaba.  

Citigroup analyst Alicia Yap expects the pandemic and lockdowns to take a toll on Alibaba’s profit. Further, the analyst expects the pandemic to delay the recovery process. Yap maintains a bullish stance on Alibaba but lowered the price target to $177 from $200.  

Besides Yap, several analysts have recently cut their price targets on BABA stock. Charlene Liu of HSBC expects COVID-19 and geopolitical headwinds to hurt Alibaba’s financials. However, the analyst recommends a Buy on BABA stock, citing limited downside risk and a favorable risk/reward scenario. 

While analysts reduced price targets, TipRanks data shows that hedge funds have been offloading BABA stock. Per the TipRanks Hedge Fund Trading Activity tool, hedge funds decreased their BABA holdings by 252.9K shares in the last quarter. 

Bottom Line

The slowdown in the Chinese economy, the recent spread of the virus, and disruptions from the Russia/Ukraine conflict pose challenges for Alibaba. However, BABA’s dominant positioning, growing active consumer base (Alibaba added 43 million active consumers in Q3), and ongoing investments in logistics networks and global cloud infrastructure provide a solid base for long-term growth. 

BABA stock has received 16 Buy and one Sell recommendations for a Strong Buy consensus rating. Further, the average Alibaba price target of $174.12 implies 74.6% upside potential to current levels.

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What happened Shares of JD.com (NASDAQ: JD) fell 19.2% in March, according to data from S&P Global Market Intelligence.

Alibaba (BABA) closed the most recent trading day at $103.53, moving -0.71% from the previous trading session. This move lagged the S&P 500's daily loss of 0.27%. At the same time, the Dow added 0.4%, and the tech-heavy Nasdaq lost 0.18%.

Alibaba (BABA) closed the most recent trading day at $103.53, moving -0.71% from the previous trading session. This move lagged the S&P 500's daily loss of 0.27%. At the same time, the Dow added 0.4%, and the tech-heavy Nasdaq lost 0.18%.

Tuesday was a bad news, good news kind of a day for investors in Chinese large-cap tech titan Alibaba Group (BABA).

Bad news first: JPMorgan analyst Alex Yao reduced his bank's forecast for Alibaba's revenue in calendar years 2022 and 2023, shaving off 2% this year, and 5% next. Yao also cut his "non-GAAP EPS estimates" for Alibaba by 9% in 2022, and by a whopping 22% in 2023, reflecting "more cautious assumptions of cost optimization efforts and the de-leveraging of business scale." GAAP earnings got revised lower by an even harsher 15% (in 2022) and 31% (in 2023).

As the analyst explained, Alibaba's near-term results face "downside risks to... consensus expectation for March quarter and June quarter results" in 2022, as "the impact from the COVID-19 resurgence negatively affects the domestic ecommerce operation. The resurgence of COVID-19 cases forced Shanghai to go into a full lockdown on 1 April," and Shanghai alone accounts for about 4% of Alibaba's retail sales in China. Shenzhen was also locked down for "a couple of weeks in March," as were "several other provinces/cities."

Combined, Yao expects these lockdowns will subtract several percentage points of sales growth from Alibaba's March and April results. As a result, JPMorgan is now expecting that sales will not grow, but rather shrink year over year in the first half of calendar year 2022, falling 4% in the March quarter and 2% in the June quarter. And looking out a bit further, the analyst forecasts no more than 1% and 4% sales growth in the September and December quarters, respectively.

Nor will Alibaba's other, non-e-commerce business lines fare any better. To the contrary, Yao sees "downside risks for most of Alibaba's business segments' growth outlook in the coming two quarters," with lockdowns disrupting "local consumer services," the Russia-Ukraine war messing up logistics and depressing international business, and finally cloud computing growth suffering from weak demand in the year's first half. Growth will be good enough to keep revenues still rising -- 18% company-wide in 2022, and 11% in 2023 -- but earnings are expected to decline in both years.

So that's the bad news. Now the good news:

Yao raised his price target on Alibaba stock from $65 a share to $75 a share, despite lowering expectations for both sales and earnings for the year. Citing "improving market sentiment after China's Vice Premier Liu He gave a pro economy growth speech in mid-March," and also reduced (U.S.) delisting risk in light of "the newly announced consultation paper on overseas listing regulations by China SEC," Yao sees investors as likely willing to pay as much as 11 times even reduced 2022 earnings to own a piece of Alibaba today, versus a previous prediction of 7x his former estimate of what Alibaba might earn.

However, even if Yao is right, and Alibaba is worth $75 instead of just $65 a share, Alibaba stock is still overpriced by ~28%. Accordingly, Yao is sticking with his Underweight (i.e. Sell) rating on Alibaba stock. (To watch Yao's track record, click here)

Yao, however, is the only bear in the picture right now, with the stock displaying a Strong Buy consensus rating. The 12-month average price target stands at $176.03, marking ~70% upside potential from current levels. (See BABA stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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