Has Alibaba Stock Finally Bottomed?

Share Price Performance:

• The U.S.-listed Alibaba ( $Alibaba(BABA)$ ) fell 5.32%, while HK-listed Alibaba ( $Alibaba(09988)$ ) fell 6.35% year-to-date, outperforming the Hang Seng Tech Index, which has posted a -15.05% return year-to-date.

• However, BABA is currently trading at USD 73.39, which is still down 77% from its all-time high of USD 317.

Source: Bloomberg, 14 Feb 2024

Technical Analysis:

• There is an inverted head and shoulders pattern in the making, which will be fully formed once it breaks above the neckline at USD78.

• The earlier inverted head and shoulders pattern successfully formed and propelled Alibaba's stock price to USD 119 in early 2023. While this pattern has worked well for Alibaba in the past, we would like to see a successful breakout of the neckline at USD78 to form a bullish technical view.

• The USD57 to USD58 range, which is also the 241.4% of the Fibonacci Extension level, is a major support level, and investors may capitulate on Baba once it breaks its all-time low at USD57.20. We see a possibility of Baba falling to USD34.34, which is 261.8% of the Fibonacci Extension level, in the worst-case scenario.

• The longer-term resistance levels are USD58.39, USD77.63, USD103.14, USD126.27, and USD144.43.

Source: Tiger PC App

Source: Tiger PC APP

Earnings Review:

• Alibaba's top-line revenue growth appears decent at +6% year-over-year in 3Q2024, and EBITA year-over-year growth looks unexciting at 2%.

• However, upon closer examination of the bottom lines, one would notice that year-over-year growth in operating income and EPS were -36% and -68%, respectively.

• CEO Eddie Wu stated during the earnings call, "Our top priority is to reignite the growth of our two core businesses: e-commerce and cloud computing."

Source: Alibaba Presentation Slides

Taobao and Tmall Group

• Even though Alibaba is concentrating on revitalizing its China e-commerce business, the year-over-year revenue growth is quite disappointing at 2%.

• 1st-party direct sales and 3rd-party customer management managed to grow by 2% and 0%, respectively.

• The consistent slower growth of 3rd-party customer management compared to 1st-party direct sales indicates that Alibaba is less effective at attracting more 3rd-party sellers (to spend on advertising or generate sales) relative to PDD.

Source: Alibaba Presentation Slides

Cloud Intelligence Group

• The Cloud unit, which is supposed to be the fastest-growing segment, only grew by 3% year-over-year in the latest quarter, whereas Amazon AWS, Microsoft Azure, and Google Cloud grew much faster at +13%, +30%, and +25%, respectively, during the same period.

• Alicloud also faces intense competition from local cloud players such as Tencent, Huawei, Baidu, and state-owned telecom giants like China Mobile, China Telecom, and China Unicom.

Source: Alibaba Presentation Slides

 Alibaba International Digital Commerce Group

• The revenue growth of the said segment rose by 44% in the 3Q2024, but I suspect that the year-over-year growth in operating income (although not disclosed) experienced a significant decline.

• Alibaba has reorganized its reporting structure since 1Q2024, and investors are no longer able to see the segment breakdown of the operating income.

• It is estimated that Alibaba invested over US$1.8 billion in its e-commerce subsidiary Lazada last year. Therefore, the 44% year-over-year revenue growth, which appears promising, may come at a substantial cost.

Source: Alibaba Presentation Slides

Conclusion:

• Alibaba was once considered the darling of value investing, attracting famous value investors like Mohnish Pabrai and Charlie Munger.

• Despite its seemingly cheap price-to-earnings (PE) ratio of 9.9x, trading at minus 1.3 standard deviations against its 5-year historical mean of 26.7x, we believe Alibaba lacks the long-term catalysts necessary to drive its stock price higher.

• We remain concerned about Alibaba's lacklustre earnings outlook, intense competition in the Chinese e-commerce market, flip-flopping structural changes (such as its IPO pivot and management reshuffle), weak retail sales in China, and fears of margin compression.

• Overall, we maintain a neutral stance on Alibaba.

• While its cheap valuation may attract some investors, we caution that cheap valuation alone should not be the sole reason to invest in a stock.

• We would not be surprised if Alibaba experiences a rally due to its cheap valuation, but we prefer other Chinese platform companies like Tencent( $TENCENT(00700)$ ), Meituan, and Pinduoduo, which we believe have stronger long-term growth catalysts.