Ali Baba (NYSE:BABA) the stock languishes at a depressed level, but so do the stocks of many of its top tech peers. Yet what is specifically causing BABA stock to underperform? The fundamental outlook for the Chinese e-commerce giant is quite robust. You can see it in the mostly bullish analyst positions.
Of the 22 analysts rating BABA stock, 19 are in the bullish camp and three remain on the sidelines, according to data compiled by TipRanks.
Alibaba is a conglomerate with various businesses under its umbrella. Besides its booming e-commerce core business, it has a strong presence in the cloud. So what’s he got once high robber? Is a reversal imminent? And does the valuation look attractive at current levels?
BABA Stock’s Lean Run
BABA stock peaked in mid-2020 after being stuck in a wide trading range since mid-2017. The stock gap widened on July 6, 2020, as the reduction in the Covid-19 pandemic 19 in China sparked a -rally in Chinese stocks. The stock quickly rose to a high of $319.32 on October 27, 2020 and then floundered.
Regulatory issues and a weak Chinese economy dragged the stock down from its all-time high and put it on a bearish path. BABA stock is currently threatening to break below the lower end of the three-year trading range seen between mid-2017 and mid-2020.
Slowdown in consumer spending Mars Fundamentals
Alibaba reports on four business segments, namely Basic Commerce; Cloud computing; digital, media and entertainment; and innovation and other initiatives.
In the September quarter, core trading accounted for $26.57 billion, or 85% of total revenue of $31.147 billion. Within this segment, the top revenue source was customer management revenue (CMR), which contributed $11.13 billion or 36% of revenue.
CMR is the money the company charges merchants on its Taobao and Tmall e-commerce platforms, for services such as marketing.
Despite the dominant share, CMR’s revenue grew only 3% year over year in the September quarter, down sharply from the 14% growth in the June quarter.
The “other” retail segment in China recorded strong growth. In the September quarter, revenue more than doubled to $8.6 billion. The segment includes contribution from direct selling companies including Sun Art, Tmall Supermarket, Freshippo and direct import.
Third-quarter cloud computing revenue was $3.11 billion, or about 10% of the total. Digital media and entertainment and innovation and other initiatives accounted for 4% and 1% of total revenue, respectively.
Overall operating profit for the September quarter was $2.33 billion. The business activity collected $3.98 billion in operating revenue, helping to offset losses suffered by the remaining segments.
The growth of e-commerce threatened?
China’s economic growth slowed in the second half of 2021, crippled by the electricity shortage, the national real estate crisis and a slowdown in consumption amid Covid-19 restrictions. Retail sales in the country rose at an anemic 1.7% year-on-year in December, a slowdown from the 3.9% increase in November. It also marked the slowest rate of increase since August 2020.
The slowdown in retail sales does not bode well for Alibaba.
Here’s how the company has fared in terms of core business activity since the first quarter of 2020:
After peaking in the fourth quarter of 2020, commerce revenue growth has been on a downward trend. The slowdown is also a function of growing competition from smaller domestic rivals.
In November 2021, Alibaba reduced its full-year revenue forecast. The company now expects revenue growth of 20% to 23% year-on-year, down from the 29.6% growth implied by the 930 billion yuan forecast it released in May 2021. .
Alibaba’s Troubles with the Communist Regime
In addition to macroeconomic challenges, Alibaba is also facing the heat of regulatory repression. In late October 2020, Alibaba founder and former chairman Jack Ma criticized the communist regime for inefficiencies in the national financial system. This led to a series of retaliatory actions by the government, which amounted to a witch hunt.
Just before its fintech unit Ant Financial’s proposed $34 billion initial public offering, Alibaba was forced to scrap its ambitious listing plans.
In April 2021, China’s State Administration for Market Regulation imposed a record $2.75 billion fine on Alibaba for its anti-competitive practices. Subsequently, the government required Ant to organize itself as a bank holding company, subjecting it to stricter disclosure standards and capital requirements.
Regulators also canceled an information-sharing partnership with Alibaba’s cloud computing business over a lack of adequate response and action on a cybersecurity vulnerability.
A threat of delisting has also been an overhang on BABA’s actions amid not-so-cordial relations between China and the United States.
What to expect from Alibaba’s third quarter results?
Alibaba is due to release its third-quarter results on Thursday, before the market opens. Analysts on average estimate the company is reporting earnings per share of $2.56, up from $3.35 per share a year ago. Revenue is estimated at $38.92 billion, marking a 15.6% year-on-year increase and a 25% quarter-over-quarter increase.
Ahead of the results, BABA stock received a series of downward price target adjustments. Mizuho Securities analyst James Lee cut his price target for the stock from $215 to $180. The analyst is bracing for a “challenging quarter” but expects CMR’s revenue to bottom in the March quarter.
The inference does not seem unfounded. Year-on-year retail sales growth in China slowed significantly during the October-December period.
The essentials on BABA shares
The present is tense, although the future could be perfect for BABA stock. The market priced in a slowdown in trade revenue for the December quarter. The extent of the slowdown and comments regarding the outlook for fiscal year 2021 which ends in March 2022 could move the stock on Thursday.
Given that the stock fell far too far ahead of earnings, a sharp pullback from current depressed levels is unlikely. Consolidation around the recent trading range is more likely in the near term.
BABA stock could see a turnaround as the dark skies surrounding the company’s fundamentals clear up. The current level therefore provides an attractive entry point to take advantage of the long-term opportunity presented by this leading Chinese tech name.
At the date of publication, Shanthi Rexaline did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Shanthi contributes to InvestorPlace.com as well as a staff writer with Benzinga. With a bachelor’s degree in agriculture and an MBA specializing in finance and marketing, she has approximately two decades of experience in financial information and analysis, and specializes in the biopharmaceutical and electric vehicle sectors.