Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alibaba, the Chinese e-commerce and cloud giant, recently released its Q3 FY2023 report, showing a 2% YoY rise in revenue to ¥247.8bn ($35.9bn), beating analyst estimates by $40m. The company's adjusted net income rose 12% to ¥49.9bn ($7.2bn), or $2.79 per ADS, surpassing consensus estimates by $0.39. Despite this positive earnings growth, the stock price remains over 70% below its all-time high of October 2020, and the question arises whether this presents a buying opportunity for investors willing to overlook near-term problems.
Alibaba's major growth engines are its China commerce segment, which accounted for 68% of its revenue in the first nine months of FY2023, and its cloud segment, generating 9% of revenue. These segments were expected to drive long-term growth, but an antitrust investigation in 2021, leading to a record fine and tighter restrictions, hindered the growth of Alibaba's e-commerce business. Other factors, such as inflation, sluggish consumer spending, and periodic lockdowns, have also impacted its cloud services, resulting in declines in both segments.
The decline in these core businesses is concerning as they were the only divisions generating adjusted EBITA profits, which regularly financed the expansion of Alibaba's smaller, unprofitable businesses. However, Alibaba has managed to maintain its adjusted EBITA margins of the Chinese retail and cloud segments at 33% and 2%, respectively, and has cut costs in all of its loss-making units during this period. The company expects growth to stabilize this year as China eases its zero-tax restrictions, and CEO Daniel Zhang has stated that the recovery is likely to continue throughout the year.
Alibaba's cloud business is also expected to stabilize as large companies resume their spending on hybrid cloud deployments, which have been delayed due to quarantine measures. Alibaba Cloud's growth in the financial services, education, and automotive industries is expected to offset the decline in revenue from the Internet sector, largely due to ByteDance's decision to begin removing TikTok from Alibaba's overseas servers in 2021.
Analysts expect Alibaba's revenue to grow by 3% in FY2023 and 12% in FY2024 as China's macroeconomic environment improves, making the stock look historically cheap at 14 times next year's earnings estimates. However, Alibaba's recovery is fragile and still threatened by US delisting, and its cloud business may suffer from the Biden administration's recent ban on selling advanced chips to China. In addition, investing in rival Alibaba Pinduoduo, which operates with a simpler business model and is growing much faster, may make more sense as a long-term play in the Chinese e-commerce market.
While Alibaba's valuation may limit its downside potential, there is no reason for the stock to take off this year. It may be worth keeping a close eye on it, but investors should not rush to buy it when other high-quality stocks are still available.
As long as the price is below 95.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 87.70
- Take Profit 1: 85.00
- Take Profit 2: 76.00
Alternative scenario:
If the level of 95.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 95.00
- Take Profit 1: 102.00
- Take Profit 2: 110.00
