Chinese tech behemoth Alibaba (NYSE: BABA) has had a rough couple of years. Just when it seemed that its regulatory woes were in the rear-view mirror, the resurgence of COVID-19 in China and the troubling worldwide economic situation have thrown a wrench in its plans for a comeback. Nevertheless, BABA operates a highly-diversified tech business with a massive growth runway across most segments. Still, it's tough to feel upbeat about its prospects, at least in the near term.
Hence, we are bearish on BABA stock for the short term.
As mentioned earlier, BABA stock has been under major duress over the past couple of years. It's faced massive disruption amid the crackdown by the Chinese government. Fast-forward to 2022, and you have a potential recession on the horizon.
Stock markets have tanked since the start of the year as the world economy deals with many problems. Particularly in China, the coronavirus outbreak in major cities, including Shanghai, has significantly affected the Chinese economy.
Moreover, the impact of the COVID-19 resurgence has been clearly reflected in the company's first-quarter results, which we will dive into later in the article.
Nevertheless, I feel that the current bear market is an incredible opportunity to pick up BABA at multi-year lows for the long term, even though it's likely not great for the short term. As the Oracle of Omaha Warren Buffet puts it, "be fearful when others are greedy and greedy when others are fearful."
Bleak Earnings PerformanceAlibaba reported its second-quarter results, and headline numbers were remarkably underwhelming. Revenues of $30.7 billion remained flat year-over-year, mainly due to the drop in sales from the China commerce segment. Moreover, operating income and adjusted EBITA figures dropped by 19% and 18%, respectively. Also, non-GAAP net income declined by 30%. Perhaps the brightest spot for the company was a 10% improvement in Cloud revenues. However, it forms just 9% of the company's sales.
Its Chief Financial Officer Toby Xu states that the company did relatively well despite the macroeconomic challenges. He states, "We have narrowed losses in key strategic businesses, given ongoing improvements in operating efficiency and increasing focus on cost optimization."
Another positive is its strong liquidity positioning. Free cash flow from the second quarter came in at a spectacular $3.3 billion, a 7% improvement from the prior-year quarter. Net cash from operating activities was $5.1 billion, a 1% increase from the same quarter last year, while its cash balance stood at an amazing $69.1 billion.
Alibaba Cloud vs. Amazon Web ServicesAs discussed earlier, the only bright spot for Alibaba was the 10% improvement in revenues it generated in its Cloud segment. Alibaba has been quickly growing its market share in China, and its cloud segment has been one of the most consistent segments for the company. However, its growth trajectory is comfortably dwarfed by Amazon's (NASDAQ: AMZN) Amazon Web Services (AWS).
AWS has been a key contributor to Amazon's top-line expansion over the past several quarters. It generated a tremendous $19.7 billion in sales for the firm in the second quarter alone, indicating a 33% improvement on a year-over-year basis. AWS's contribution to Amazon's total sales is at roughly 16% and is expected to rise to over 20% within the next couple of years.
Conversely, Alibaba Cloud generated $2.6 billion in sales during the second quarter, showing 10% growth on a year-over-year basis. Cloud sales represented just 9% of Alibaba's total sales, while its core business constituted a dominant 76% market share.
Needless to say, Alibaba has a lot of catching up to do regarding its Cloud business. AWS is growing significantly quicker than Alibaba Cloud and holds a dominant position in the market. AWS is ranked the number one global cloud service while Alibaba is at a distant fourth, with just a 5% market share.
What is the Target Price for BABA Stock?Turning to Wall Street, BABA stock maintains a Strong Buy consensus rating. Out of 18 total analyst ratings, 17 Buys, zero Holds, and one Sell rating were assigned over the past three months. The average BABA price target is $156.12, implying 97.3% upside potential. Analyst price targets range from a low of $130 per share to a high of $205 per share.
Conclusion: BABA Continues to Face HeadwindsAlibaba's recent quarterly performances have been disappointing, with near-term prospects remaining bleak. Like other tech companies, it faces several headwinds that continue to weigh down the stock. Consequently, its stock has taken quite a beating, and it now trades near all-time lows.
However, it isn't the end of the world for the company. It still has plenty of growth catalysts, including its Cloud business which could become a cash cow down the road. Still, it's still far from reaching its true potential in the space.
Hence, BABA stock is arguably an unattractive short-term bet, especially for those unable to stomach the volatility. The stock market isn't going to take too kindly to upcoming earnings misses, which seem likely given the current circumstances. It will take a while before BABA stock can return to its winning ways.
The odds might not be in favor of Chinese tech behemoth Alibaba (NYSE:BABA) right now, but the tides may turn soon. Its recent $1 billion investment in its cloud business might help Alibaba balance the e-commerce woes until the latter gets back on its feet again.
Given that over the past few years, Alibaba’s cloud business has quickly emerged as a major revenue driver, emphasis on this business may help solve some problems for the company. It is worth noting here that Alibaba Cloud was the world's third-largest provider of public cloud service, as of 2021.
Alibaba's Billion-Dollar Resurrection PlanAlibaba recently pledged $1 billion for a “global partner ecosystem upgrade,” which involves funding the technological innovations of global partners handling the sales, tech support, and customer service areas of the company’s worldwide cloud business. This may help uplift the thriving business, which is facing some headwinds currently.
The growing national security trust issues between China and the U.S. have driven several customers away from the Alibaba Cloud in favor of foreign servers. Even the Chinese short-video posting platform TikTok moved its data to Oracle servers to avoid regulatory scrutiny in the future. This makes us think that the investment might have been part of Alibaba’s efforts to retain its existing partners and even attract more partnerships and adoption.
The threat to Alibaba’s footing in the global cloud market can be mitigated via this investment. Importantly, Alibaba Cloud’s 11,000-strong partner roster includes U.S. tech giants Salesforce (NYSE:CRM), VMware (NYSE:VMW), Fortinet (NASDAQ:FTNT), and IBM (NYSE:IBM). This gives us a deeper insight into why Alibaba needs to up the ante in partner retention efforts.
Additionally, current trends in Alibaba’s core e-commerce business are not so encouraging. Overall, consumer demand has slowed considerably and is expected to remain so for some time. So far this year, Alibaba’s shares have lost 33%. Multiple headwinds played a part in the decline, including China’s zero-tolerance policy to control the resurgence of COVID, inflation, trade hostilities with the U.S., fear of getting delisted along with other Chinese stocks, etc.
Even now, the outlook for China’s economic growth is dim. Goldman Sachs recently sharply trimmed its 2023 growth forecast for China to 4.5% from 5.3%, citing continued COVID-Zero policies in Beijing at least until the first quarter of 2023 ends.
Therefore, the next best thing for Alibaba to do is take its cloud business up a notch to balance the weakness in e-commerce. To that end, the investment may be a great stepping stone. Although the company heavily relies on its e-commerce business for revenues, a meaningful and growing part of its revenues comes from its huge cloud business, which has managed to compete for head-on with the likes of Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ:MSFT).
Is it Safe to Buy Alibaba?All things said, Alibaba is a safe investment option.
Alibaba’s three retail segments contribute more than 50% of overall retail sales in the vast economy of China. So, as the economy recovers (which it will, like it does after every market cycle), this part of the business should be the first to rise.
Moreover, the global $1 billion cloud program is expected to boost its footing in the global cloud market. Interestingly, the global cloud computing market is still growing and is expected to reach $480.04 billion by the end of this year, according to Fortune Business Insights. Remarkably, by 2029, this number is likely to increase to $1.712 trillion. Alibaba’s stronghold is only going to get stronger with efforts like these.
Also, even if the stock runs the risk of getting delisted from the NYSE, investors will be given a chance to cash out, so that shouldn’t be a worry.
What is the Target Price for BABA Stock?Wall Street analysts are bullish on BABA, with a Strong Buy consensus rating based on 17 Buys and one Sell. The average price target stands at $156.12 currently, which means it still has room for growth by about 99%.
Footnote: This Could Be a Great Time to Buy AlibabaVarious upsides can be seen which can drive Alibaba’s long-term trajectory, like market dominance and economic recovery in China.
Moreover, the company’s current valuation is around 44.5x trailing 12-month earnings, which is significantly below its 5-year high of 67.6x, which it achieved in July this year.
These call for some serious consideration from investors without any recent bias to accumulate shares of BABA.
Shares of Chinese tech titan Alibaba (NYSE: BABA) have continued to tumble further into the abyss amid the perfect storm of headwinds. China's macroeconomic headwinds and government-placed hurdles have weighed most heavily on Alibaba stock's multiple. Though Alibaba stock may seem more like a value trap than a deep-value play through the eyes of American investors, I do think that shares are likelier to fall into the latter category for investors with investment horizons beyond five years.
It's the government-related risk of Chinese stocks that makes it difficult for investors and analysts to formulate accurate financial models. Alibaba is a wonderful and dominant business that rivals the likes of the most powerful American FAANG stock. Still, Alibaba stock and other Chinese tech giants deserve to trade at a discount relative to the harsh regulatory environment it has little to no control over.
After shedding 72% of its value from peak to trough, I think regulatory risks are now more than baked into the share price. At the end of the day, Alibaba is an original innovator building great things. As Alibaba's management team becomes better at following strict rules laid out by the Chinese government, I think the impact of stiff penalties and growth-stunting new measures can be mostly avoided.
In essence, management is just getting accustomed to the harsh new realities that could take away its long-term growth rate and margins. Even with a less-than-ideal regulatory environment, Alibaba seems like a firm that can continue powering higher over time. I remain incredibly bullish on BABA stock, even though much greater uncertainties are involved with betting on Chinese tech stocks at this juncture.
On the surface, Alibaba looks like a ridiculously cheap stock.
Profitability-Preservation Mode Could Steady BABA's Sails in a DownturnIt's been the perfect storm of headwinds for Alibaba stock over the past year and a half. Management noted that macro headwinds could continue to take a stride out of the firm's step. In response to macro question marks, Alibaba is looking to do everything it can to steady the sails. The company is looking to trim away costs across the board. Undoubtedly, many American tech firms have been doing the same in recent weeks in response to macro storm clouds that seem to be closing in.
Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) is just one firm looking to make the most of the recession to lean out and improve productivity by 20%. CEO Sundar Pichai may accomplish his goal of improving per-employee productivity as Alphabet looks to take a step back to "simplify."
Alphabet isn't the only firm that could make the most of a bad macro situation. The Chinese tech giants, Alibaba in particular, seem to be focused on driving company efficiencies. Like Alphabet, Alibaba has its hands in many hot growth markets, from digital commerce to the cloud. Looking ahead, Alibaba is looking to keep its foot on the pedal with businesses that show "long-term potential" while looking to wind down money-losing businesses or segments that aren't pulling their own weight.
Indeed, being a tech behemoth comes with its perks going into a downturn and rate-tightening cycle: they have the agility to swiftly pivot towards margin-driving initiatives and away from expensive, forward-looking, unprofitable endeavors. Once credit is easy and the economy is booming again, firms like Alibaba and Alphabet can easily allocate funds back to "moonshot" non-core growth drivers and away from their profitable core.
In the meantime, Alibaba will be busy re-evaluating its business divisions to maximize profitability in a time when operating efficiencies matter more than growth stories. I think Alibaba's pivot toward greater efficiencies has yet to be factored into the share price.
Though the turbulent Chinese tech scene will always be subject to wild swings, I think the stock has overswung to the downside. Alibaba is taking its foot off the gas with certain non-core areas of its business while it continues to invest in its core growth drivers like e-commerce.
At writing, shares of Alibaba trade at a low 1.7x price-to-book (P/B) ratio and at a 2.1x price-to-sales (P/S) ratio, both of which are a far cry below five-year historical averages of 5.7x and 8.2x, respectively.
Is BABA Stock a Buy, Sell, or hold?Turning to Wall Street, BABA stock comes in as a Strong Buy. Out of 18 analyst ratings, there are 17 Buys and one Hold recommendation. The average Alibaba price target is $156.12, implying an upside of 74.5%. Analyst price targets range from a low of $130.00 per share to a high of $205.00 per share.
Conclusion: BABA Stock Looks CheapHistorically, Alibaba's depressed multiples suggest the stock is close to the cheapest it's ever been. Even with regulatory unknowns, macro headwinds, and delisting threats, the stock seems like a prime pick-up for a long-term investor willing to endure considerable pain over the near-to-medium term for a shot at potentially outsized long-term gains.