Macro conditions are weighing on Alibaba shares, but upcoming investor day event could put some focus on growth initiatives, says analyst
U.S.-listed shares of Alibaba Group Holding Ltd. continued their decline Friday as analysts continued to weigh in on the company’s disappointing earnings report and its slashed forecast driven by macroeconomic pressures in China as well as competitive dynamics in the market.
Alibaba’s American depositary receipts BABA, -2.27% are off 2.1% in Friday afternoon trading, after falling 11.1% in Thursday’s session to post their worst single-day selloff in roughly 11 months.
“While we continue to see few near-term positive catalysts for shares, a December investor day should help reset growth and margin expectations, and provide more visibility into management’s key areas of strategic focus,” Baird analyst Colin Sebastian wrote in his note to clients, while maintaining an outperform rating on the shares but cutting his price target to $180 from $260.
Alibaba’s 9988, -10.71% disappointing report Thursday came as rival JD.com Inc. JD, +3.92% posted upbeat results that helped send its shares higher.
Speaking generally, Sebastian wrote that the “[c]ompetitive dynamic is evolving” for Alibaba as the company “continues to face more intense competition in both high tier cities/more developed regions and less developed/rural areas.”
As a result, Alibaba is “focusing on growing the customer base as well as increasing engagement, with monetization to some extent on the back burner,” Sebastian continued. Despite some growth challenges in China, he was encouraged by the company’s international performance, as well as its progress with initiatives like group buying and local services.
Investors seem focused on the macro story when it comes to Alibaba, according to Sebastian, but he thinks that the company’s investor day, which kicks off Dec. 16, can put more attention on “key areas of investment, multi-app strategy, infrastructure build-out along with medium-term growth and margin expectations.”
Benchmark Research analyst Fawne Jiang also noted that Alibaba “has been aggressively investing in strategic areas” to help its growth story, though she acknowledged that despite some progress, “these new businesses may take time to materialize on monetization.”
Accordingly, the Chinese e-commerce giant “will likely go through multi-quarter muted earnings growth with elevated spending while growth of their most profitable segment remains uncertain,” Jiang continued.
She suggested the stock’s selloff may be overdone, as the stock is now trading at “12x its ex-cash core earnings,” meaning that investors are “essentially discounting all the other assets” such as the company’s “leading” cloud and logistics, businesses, as well as its efforts in omnichannel commerce.
“These assets can gradually become profit centers contributing to earnings growth, though the stock will need some patience from the markets,” Jiang wrote, while reiterating a buy rating but cutting her price target to $245.
J.P. Morgan’s Alex Yao likes the long-term opportunity for Alibaba as well, even though the company’s “multi-year transition stage” might bring muted earnings growth.
“To some degree, Alibaba should have stepped up its investment intensity in the past few years when new innovations emerged in China’s e-commerce market, in our view. However, from a group perspective, we think some of the early investments (e.g. cloud, fintech, logistic, etc.) will start to bear fruit and should more meaningfully drive the share price in the next few years,” he wrote in a note to clients.
Yao kept his overweight rating on Alibaba shares but cut his price target to $210 from $255.
The stock has tumbled 39.6% year to date, while the iShares MSCI China exchange-traded fund MCHI, +0.53% has lost 15.1% and the S&P 500 index SPX, -0.14% has climbed 25.2%.