Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alibaba stands out with numerous competitive advantages, yet its performance on the stock market has been notably disappointing. Over the past three years, shares of the Chinese tech giant have witnessed a substantial 68% decline, with limited indications of a recovery. Despite optimistic expectations surrounding the rebound of the Chinese economy post-pandemic, the potential unlocking of value through a breakup plan, and the anticipation of business recovery following Beijing's tech sector crackdown, these scenarios have not materialized as expected.
However, this does not imply that Alibaba is without hope. It is essential to examine the reasons behind considering buying, selling, or holding this Chinese e-commerce stock in the current scenario.
Several compelling reasons make Alibaba stock appear attractive as a buy. Firstly, the company is experiencing an acceleration in revenue growth, with a notable 9% increase in its most recent quarter. Furthermore, Alibaba showcased expanding margins, as reflected in a substantial 34% jump in operating income. This revenue growth demonstrates Alibaba's resilience and ability to thrive in a challenging Chinese economic environment, even as competitors like Pinduoduo-parent PDD Holdings gain ground in the country's e-commerce sector.
From a valuation perspective, the stock appears undervalued when compared to historical benchmarks. Despite its significant profits, Alibaba's price-to-earnings ratio stands at less than 10, indicating considerable upside potential if the company can sustain consistent growth. Additionally, there is room for the stock to appreciate if investors reevaluate their stance on Chinese stocks, potentially reducing the discount typically applied to such investments.
Alibaba's decision to spin off some secondary businesses outside its core e-commerce operations has also resonated positively with investors. Although the plan faced a setback when the company opted not to spin off its cloud division due to US chip export restrictions, it remains committed to spinning off other segments, such as logistics and digital entertainment. This strategic move has the potential to unlock value for investors.
The primary risk confronting Alibaba stock remains the prevailing uncertainty surrounding the Chinese economy and the regulatory landscape. The previous regulatory crackdown exerted significant pressure on Alibaba, resulting in a substantial anti-monopoly fine and various divestitures. This strategic move was an attempt to appease Beijing's concerns about the perceived excessive power held by Chinese tech giants. Adding to the challenge, economic indicators from China continue to display weakness, with the December Purchasing Managers Index signaling a marginal decline in factory activity, indicative of an elusive recovery.
The World Bank's projections for a slowdown in China's GDP in 2024, coupled with challenges such as declining property values, escalating youth unemployment, geopolitical tensions with the US related to semiconductor technology, and a sluggish manufacturing sector, further contribute to the uncertainties surrounding Alibaba's prospects.
The rationale for holding Alibaba lies in the dynamic nature of the business. While the spinoff plan faced setbacks due to new US chip export regulations, raising capital through alternative means could boost the stock and align with the preferences of Chinese regulators. Notably, Alibaba has changed leadership, with Eddie Wu assuming the role of CEO in September, taking charge of the core e-commerce business. Wu is keen on enhancing the company's focus on artificial intelligence, implementing a youthful management team, and prioritizing a user-centric approach.
Alibaba's strategic positioning faces challenges from emerging competitors like Pinduoduo and Douyin (China's TikTok), which have rapidly gained market share in recent years. As Alibaba endeavors to reinvent itself, investors may find it prudent to retain the stock until more definitive turnaround signals emerge.
As long as the price is below 77.00, follow the recommendations below::
- Time frame: D1
- Recommendation: short position
- Entry point: 72.52
- Take Profit 1: 66.00
- Take Profit 2: 60.00
Alternative scenario:
If the level of 77.00 is broken-out , follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 77.00
- Take Profit 1: 82.00
- Take Profit 2: 87.00
