Source: PaxForex Premium Analytics Portal, Fundamental Insight
With a staggering 47% decline in shares over the past half-decade, Alibaba Group has been an uninspiring investment for those in it for the long haul. The Chinese titan, known for its presence in e-commerce and technology, grapples with persistent political ambiguity, market vulnerabilities, and the encroachment of agile competitors.
The looming question remains: can this corporate giant orchestrate a turnaround in the next five years, or is it bound to endure further stagnation? Let's delve into the matter.
Similar to numerous entities in the digital realm, Alibaba witnessed a surge in performance post the COVID-19 outbreak, reaching its zenith with a stock price pinnacle of approximately $313 in October 2020. However, the tides swiftly turned. The predicament began unfolding in November 2020 when Chinese regulators initiated a clampdown on domestic tech entities, apprehensive of their burgeoning size and influence.
Alibaba's woes compounded when Chinese authorities impeded the anticipated initial public offering (IPO) of its financial technology arm, Ant Group. Subsequently, both Alibaba and Ant Group found themselves embroiled in a succession of hefty fines, ranging from allegations of anti-consumer practices to concerns over consumer safeguarding and corporate governance.
Amidst this turbulence, a glimmer of hope emerges with a nearly $1 billion fine levied against Ant Group in 2023, signaling a potential cessation to China's rigorous tech crackdown. As the Chinese economy grapples with its own challenges, there are indications, as per reports from the New York Times, that the government is adopting a more amiable stance towards businesses. Yet, the ramifications of past actions may already have taken their toll.
Over the span of nearly five years, China has navigated through a maze of unpredictability and policies unfriendly to business, exacerbated by enduring COVID-19 lockdowns, earning itself the dubious distinction of being arguably unattractive for investment. Notable multinational corporations like Apple and Samsung are redirecting their supply chains away from the nation, while others are shelving any future ventures in what was once considered a coveted market.
This downtrodden sentiment carries weight for retail investors, potentially casting a shadow over Chinese stock valuations, even if operational metrics exhibit improvement. As if grappling with macroeconomic challenges wasn't daunting enough, Alibaba's core operations present lackluster performances. Despite a modest 7% revenue uptick year over year to $30.7 billion, net income plummeted by a staggering 96% to $127 million, driven by a decline in the valuation of its investments in other publicly traded companies.
Alibaba's diversification into various sectors often overshadows its core ventures in e-commerce and cloud computing, potentially diluting management focus and operational efficiency in the years ahead, thereby prompting the market to continuously undervalue its worth.
Although Alibaba's management touts impressive triple-digit growth in AI-related revenue for the fourth quarter, this barely registers within its cloud computing division, which saw a mere 3% expansion year over year, totaling $3.5 billion.
Admittedly, Alibaba stands poised to lead China's domestic AI market. However, stringent US export controls on cutting-edge AI chips pose a threat to its international prospects, potentially inflating costs associated with training and deploying large language models (LLM) due to reliance on less potent and energy-efficient hardware.
Trading at a forward price-to-earnings (P/E) ratio of just 9.3, Alibaba appears attractively priced in comparison to its US counterpart, Amazon, boasting a P/E ratio of 41. Responding to this undervaluation, Alibaba's management has initiated buybacks, repurchasing a staggering $4.8 billion worth of shares in the fourth quarter alone.
While buybacks may theoretically enhance the value of remaining stock units relative to future earnings by reducing outstanding shares, they fail to address the underlying factors contributing to Alibaba's diminished stock valuation.
The prevailing sentiment among investors, skeptical of China's erratic and antagonistic market environment, coupled with Alibaba's sprawling conglomerate structure, further dims its allure. Moreover, the company's AI prospects pale in comparison to those of US counterparts.
With these formidable long-term obstacles, Alibaba's stock appears poised for underperformance against the S&P 500 over the next five years, and possibly beyond.
As long as the price is above 165.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 173.77
- Take Profit 1: 180.00
- Take Profit 2: 185.00
Alternative scenario:
If the level of 165.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 165.00
- Take Profit 1: 160.00
- Take Profit 2: 155.00
