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Alibaba Stock: Don’t Give Up Now (NYSE: BABA)


Yahoo takes a 40% stake in China

Guang Niu


Alibaba Group Holding Limited (NYSE: BABY) continued to decline towards its March and May lows after our previous update urging investors to capitalize on its pullback.

Investors were troubled by negative news across the global economy, with major currencies are being hammered by the Fed’s aggressive rate hikes. As a result, the yuan also took a big hit, as currency speculators piled on bearish bets on the yuan, with offshore USDCNH surging above levels last seen in May 2020.

Consequently, it has also hampered further attempts to ease monetary policy by the Chinese central bank, as it could encourage bearish bets on the yuan to push further. As a result, China’s attempt to close the gap to its initial 5.5% GDP growth rate looks increasingly difficult. In addition, the World Bank has also revised its forecasts at 2.8%projecting a very disappointing year for China.

Nevertheless, we have gleaned that Alibaba’s projections have not been revised downwards, despite the blows BABA has received at the hands of sellers since our previous update. Therefore, we are increasingly confident in BABA’s reward-risk profile at current levels as it nears its 2022 lows.

However, investors should note that the potential for downside volatility remains as the market could force a retest of its May lows to trap bearish investors before reversing the selling momentum. Therefore, it is essential that investors consider stratifying their exposure to capitalize on potential volatility.

We reiterate our buy rating on BABA but restrict our medium-term (PT) price target to $95 (implying 19% upside potential).

Reducing Baba’s Risks Ahead of the CCP National Congress in China

China will hold its 20th CPC National Congress in mid-October as Chinese President Xi Jinping seeks his third term. Investors had hoped that Xi might ease zero-COVID restrictions after Congress, helping lift the malaise seen in China’s economy over the past year.

As China enters its Golden Week holiday, consumer spending is expected to remain subdued. State governments continue to be vigilant in implementing COVID restrictions as China moves towards its 20th CPC. As a result, the holidays are unlikely to boost consumer spending, which could have provided a much-needed boost to China’s struggling economy. Bloomberg reported:

Passenger travel by road is expected to drop around 30% from a year ago during the National Day break, according to government data. Airline ticket prices for the period are lower than a year ago and travelers are taking shorter journeys, according to figures from hotel booking sites. Cinema box office receipts are expected to fall by more than 20%.

Nonetheless, Chinese Premier Li Keqiang stressed that the government would likely focus on fourth-quarter performance to gauge the pace of recovery. He pointed out at a recent meeting that China “the economy has recovered and it recovered and stabilized in the third quarter.” Li pointed out that the fourth quarter would be crucial, because “the last three months of the year bear the heaviest weight in annual economic activity and many policies already announced should have [a] greater impact during this period.”

Therefore, we assume that China remains on track for economic recovery through 2023, which should accelerate the pace of recovery for Alibaba, given its exposure to discretionary consumer spending.

Alibaba’s estimate revisions appear relatively moderate

Alibaba's Revenue Change % from Consensus Estimates

% change in Alibaba’s revenue from consensus estimates (S&P Cap IQ)

We understand that Alibaba’s revised revenue growth estimates are not meaningful compared to our previous update. Therefore, we posit that there is broad consensus in Street consensus that the worst impact on Alibaba’s recovery momentum is likely past.

As a result, the shape of the recovery until 2023 remains intact. Therefore, positive developments from the National Congress regarding further easing of zero COVID restrictions in China could provide upside surprises to these estimates.

As the Chinese economy recovers from its malaise through the fourth quarter, we do not expect BABA to experience any significant depreciation in its valuations going forward.

Is the BABA share a buy, sell or hold?

Trend in the valuation of BABA NTM's EBITDA multiples

Trend in the valuation of BABA NTM’s EBITDA multiples (koyfin)

Enough has been said about BABA’s low valuation, as its NTM EBITDA multiples remain close to the area of ​​two standard deviations below its 10-year average. Therefore, we believe that the March lows in BABA’s valuation would continue to offer strong support.

BABA Price Chart (Weekly)

BABA Price Chart (Weekly) (TradingView)

With the recent moves, BABA has fallen near its March and May lows, as seen above. However, we are confident that BABA could stay within the consolidation range thanks to its long-term support.

Coupled with an improving economy and potentially positive developments after the National Congress, we remain optimistic about Alibaba’s outlook through 2023.

Therefore, we reiterate our purchase note but reduce our mid-term PT to $95 to reflect more conservative multiple targets.




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