Nasdaq BABA Alibaba

It's no secret that 2022 has been a challenging year for e-commerce stocks.

E-commerce giants Amazon (NASDAQ: AMZN) and Alibaba (NYSE: BABA) both experienced massive growth during the pandemic, but that has now come to an end. Following the reopening, consumers hit the high road again, and the economic downturn has also impacted growth. In a sense, the slowdown was to be expected; the number of new people turning to e-commerce driven by the stay-at-home mandates was bound to recede with the resumption of normality.

However, both companies have also faced other headwinds. The pair have invested heavily for the future, and that has taken its toll on their profitability. Both are also facing increasing scrutiny from regulators, although this is an issue currently more serious for Alibaba, being watched over by the Chinese authorities. Not to mention, inflation has also played its part in consumers scaling back spending.

All of the above have also impacted the stock performance, with both down over 20% on a year-to-date basis. This brings us to the main question: which of these giants represents a better investment choice right now? Let’s check in with the TipRanks database to see what the analysts make of their prospects.

Amazon

Amazon famously started out as an online bookseller in the mid-90s, when the internet was still in its nascent stage. With the canny idea of founder Jeff Bezos, the company quickly outgrew the bookseller tag to turn into an e-commerce force. However, that was only the beginning; since then, Amazon has branched out in every direction – from cloud services with AWS to entertainment with Prime Video to smart home devices to groceries and logistics. We could go on - you name it, Amazon has probably got its fingers in it.

Online retail might be considered Amazon’s forte, but as the segment’s growth has taken a breather, its higher-margin cloud business has been growing at a fast pace.

In Q2, Amazon generated revenue of $121 billion, amounting to a 7% year-over-year increase (10% ex-FX) whilst coming in ahead of the Street's $119 billion forecast. AWS revenue increased by 33% y/y to reach $19.7 billion. Boosted by AWS's strength, operating income came in at $3.3 billion, higher than the Street's prediction of $1.75 billion, while an EBIT margin of 2.7% also beat the 1.5% consensus.

With EPS of -$0.20, Amazon sprung a negative surprise on Wall Street, as analysts expected that figure at $0.14. However, the company's outlook was solid, as it guided for revenue between $125 and $130 billion in Q3, a touch above consensus expectations (at the midpoint) for $126.5 billion.

The AWS growth supports Morgan Stanley’s (NYSE: MS) Brian Nowak’s thesis; he thinks the segment’s success will have a positive impact on other parts of the business.

“Demand remains strong as AWS’s booking backlog accelerated to ~13% Q/Q growth. AMZN is also stepping up investment in AWS (capex/D&A coming through, sales people and product engineers) as AMZN intends to lean in to drive share even through a cooling macro backdrop," Nowak noted.

"This is bullish long-term AWS growth and, in our opinion, should also be a signal about AMZN's confidence in retail profitability to come... given 1) we know AMZN's share price matters to employees, 2) shares have lagged and 3) we don't think AMZN would choose to lean into investing its AWS profit pool (that arguably has been supporting the stock through retail's struggles) unless it has confidence the retail business is likely to deliver,” the analyst added.

These comments underpin Nowak’s Overweight (i.e., Buy) rating on AMZN, while his $175 price target implies shares will climb 31.3% higher over the next year. (To view Nowak’s track record, click here)

What is AMZN Stock's Price Target?

Overall, Wall Street remains firmly in Amazon’s corner; barring one skeptic, all 37 other recent analyst reviews are positive, naturally culminating in a Strong Buy consensus rating. The average Amazon price target is just a smidgen above Nowak’s; at $177.05, the figure represents potential one-year gains of 32.85%.)

Alibaba

Often saddled with the tag “the Amazon of China," the cliché is not without reason. Alibaba remains the dominant force in the Chinese e-commerce industry, driven by its domestic Taobao and Tmall platforms, while its retail marketplace, AliExpress, is used by consumers across the globe. It is also the leader of China’s cloud infrastructure services industry, with Alibaba Cloud taking the bulk of the market share.

That said, in contrast to Amazon, whose profitability profile is driven by the success of its cloud business, Alibaba still heavily relies on e-commerce sales to offset cloud losses. The problem is that the Chinese economy’s growth has hit a brick wall, and that has taken its toll on the company.

After nearly two decades of continued expansion, in its latest quarterly report, for Fiscal Q1 2023, the company’s revenue growth went into negative territory for the first time.

Revenue dropped 0.1% compared to the same quarter last year to reach $30.69 billion, although it should be noted that Wall Street had expected that figure to be worse, having called for sales of $30.16 billion. Despite its ongoing investments, the company also posted a surprise on the bottom line; Non-GAAP EPADS of $1.75 bettered analysts’ forecast of $1.56 a share. 

Alibaba has had other issues to contend with; it has regularly tussled with domestic regulators while the prospect of Chinese stocks getting booted off U.S. exchanges has also hung over its head.

Nevertheless, it is the improving fundamentals that have elicited praise from Truist’s top analyst Youssef Squali, who believes the company is moving in the right direction.

“We remain constructive on BABA, which despite posting its first negative Y/Y revenue quarter as a public company in F1Q23, it reported results which exceeded expectations on the top and bottom lines, as fears of a Chinese macro slowdown have weighed materially on sentiment,” the five-star analyst said. “We are encouraged by the company's commentary on July trends improving from May/June, and we believe that BABA's more disciplined attitude towards organic investments should lead to a return to more profitable growth in F2H23.”

Along with a Buy rating, Squali has a $135 price target for Alibaba shares, providing room for ~53% growth in the year ahead. (To see Squali’s track record, click here)

What is BABA Stock's Price Target?

Alibaba's ratings are almost unanimously positive. One Sell rating is countered by 17 Buys, all coalescing to a Strong Buy consensus rating. The average Alibaba price forecast of $156.12 implies 69.4% upside potential from current levels.

Conclusion: BABA Stock May Have More Upside Potential

So, which stock ultimately represents a better opportunity at present? It looks like the Street’s experts think you can’t really go wrong with either, but purely from a returns perspective, with the potential upside standing at 69.4% for BABA compared to 32.85% with AMZN, the Chinese behemoth is the one to go for right now.

Disclosure

Investors in Alibaba Group Holding Ltd (Symbol: BABA) saw new options begin trading today, for the October 28th expiration. At Stock Options Channel, our YieldBoost formula has looked up and down the BABA options chain for the new October 28th contracts and identified one put

Major economies across the globe are under pressure due to sky-high inflation. In the U.S., July inflation slowed down to 8.5% from a 40-year high of 9.1% seen in June, mainly due to lower fuel prices. However, U.S. inflation still remains high, and the Federal Reserve is expected to continue to implement aggressive rate hikes to tame inflation. Meanwhile, China’s consumer price index (CPI) increased 2.7% year-over-year in July, compared to the 2.5% rise reported for June. The rise in China’s July CPI was the highest since July 2020 and was mainly due to higher food prices (specifically pork prices). However, it is worth noting that China’s inflation levels are still far below the levels seen in the U.S., Europe, and several other economies. While Chinese companies like Alibaba (NYSE:BABA) and Li Auto (NASDAQ:LI) might gain from comparatively lower inflation levels, their businesses are under pressure due to other risk factors.

Why is China’s Inflation Lower than Other Economies?

Excluding food and energy prices, China’s core CPI rose 0.8% year-over-year in July, which was lower than the 1% increase recorded in June. Overall, inflation levels in China, the world’s second-largest economy after the U.S., have been relatively much lower than in other major economies. This is because the country’s zero COVID policy led to lockdowns and impacted consumer demand. Moreover, a slump in China’s real estate sector also hurt the demand for energy and commodities.  

As per a Bloomberg report in early August, Bruce Pang, head of research and chief economist at Jones Lang LaSalle Inc., stated that China’s inflation rate "will likely rise past 3% in the next two months, due to a low base and the lift from pork prices." That said, Pang expects core inflation to remain "benign" due to weak domestic demand. "This won’t cause much restriction to the monetary policy," added Pang.

Overall, the economic downturn in China is keeping its inflation low and also helping to limit global inflation.    

Are Chinese Companies Benefiting from Subdued Inflation Levels?

While Chinese companies are gaining from comparatively benign inflation more than their U.S. counterparts, they continue to be under pressure due to country-specific factors like COVID-19 restrictions. Lockdowns led to major production and supply chain disruptions for manufacturers. Moreover, the COVID-19 resurgence also impacted consumer demand, thus hurting companies in many sectors. Furthermore, Chinese factories are suffering due to power shortages caused by one of the worst heatwaves the country has ever seen, accompanied by drought.

Let us look at the recent results of the following companies to get a better understanding of the situation in China.

Alibaba’s June Quarter Results Reflect the Impact of Lockdowns

While weak consumer spending trends and supply chain troubles amid COVID-19 restrictions impacted Alibaba’s e-commerce revenue, the company was able to beat analysts’ expectations for the June quarter (first quarter of Fiscal 2023).  

The e-commerce giant’s revenue in the June quarter remained flat on a year-over-year basis at $30.7 billion, as a 1% decline in the company’s China commerce segment revenue was offset by a 10% rise in the revenue from the Cloud segment. Meanwhile, adjusted earnings per ADS (American Depositary Share) declined 29% to $1.75.

What Are Analysts Saying About Alibaba Stock?

Baird analyst Colin Sebastian increased the price target for Alibaba stock to $140 from $134, and maintained a Buy rating. While the analyst feels that it is "too early to give the 'all-clear' signal," he contends that the company’s performance in the June quarter suggests improving trends.

Sebastian noted that Alibaba is now focused on expanding its overall wallet share rather than just building the size of its customer base. Sebastian feels that this approach could enhance the company's operating efficiency and margins over time.

Overall, Alibaba stock scores a Strong Buy consensus rating based on 17 Buys and one Sell. The average BABA price target of $156.12 implies 70.1% upside potential. Alibaba shares have declined this year due to China’s crackdown on tech stocks, geopolitical concerns, the impact of lockdowns, and delisting concerns.  

Li Auto (LI) Stock

Chinese electric vehicle maker Li Auto’s recently reported August delivery numbers disappointed investors. The company delivered 4,571 vehicles in August, down nearly 52% year-over-year and 56% compared to July.

Demand for Li Auto’s newly launched Li L9 SUV and the upcoming Li L8 model adversely impacted the demand for the company’s flagship Li ONE vehicles. However, on a year-to-date basis, deliveries increased about 57% to 75,396 units.

Last month, Li Auto reported Q2 results that missed analysts’ expectations. COVID-related disruptions and continued growth investments impacted the company’s profitability.

Is Li Auto a Good Stock to Buy?

Prior to the announcement of Li Auto’s August deliveries, Morgan Stanley analyst Tim Hsiao revealed that Li Auto announced on its mobile app that there would be a delay in the August deliveries of its L9 SUVs to August 30-September 4. The delay was caused by power shortages in Sichuan and a “production hiccup” in the company’s range extension system.

Hsiao feels that the actual effect of the delay could be marginal as the company is still at an early stage of L9 ramp-up. The analyst also added that the delay will further boost L9’s September sales. Hsiao continues to be bullish on Li Auto and reiterated a Buy rating with a price target of $53.

All in all, the Street is highly bullish on Li Auto stock, with a Strong Buy consensus rating based on nine unanimous Buys. At $68.89, the average Li Auto price target implies 159.2% upside potential from current levels.

Conclusion

Despite lower inflation than other major economies, Chinese companies might continue to be under pressure due to weak demand amid the country’s stringent COVID-19 policy and persistent supply chain woes. While Alibaba is facing sluggish demand in its core e-commerce business, Li Auto’s ability to meet the strong demand for its newly launched EV model is being impacted by supply chain troubles and power shortages.

Meanwhile, Wall Street continues to be highly bullish about the long-term prospects of these two Chinese companies.

Disclosure

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