Summary
Alibaba stock has cratered recently, and buyers fled after the stock hit its peak in October 2024.
The early momentum from China's stimulus measures has dissipated. However, has the market taken the sell-off too far?
Alibaba's monetization has improved, and its cloud segment has remained profitable.
Its international e-commerce business has also performed admirably, demonstrating its ability to rejuvenate growth.
I argue why investors who didn't chase the previous surge can consider taking advantage of BABA's recent pessimism.
I am JR research, an opportunistic investor who identifies attractive risk/reward opportunities supported by robust price action to potentially generate alpha well above the S&P 500. I run the investing group Ultimate Growth Investing.
Alibaba Stock: Suffering Another Hammering
Alibaba Group Holding Limited (NYSE:BABA) investors have endured a hammering recently, as the stock's upward momentum peaked in early October 2024. As a result, the early euphoria in BABA has given way to rationalization over its growth profile, notwithstanding its relatively attractive valuation. In my previous Alibaba article, I underscored my confidence about why China's massive stimulus package has spurred investors to return to boost BABA. However, the failed breakout above its $120 resistance zone has led to intense profit-taking over the past seven weeks, as earlier investors likely rotated out. As a result, the stock has dropped firmly into a bear market, declining more than 25% through this week's lows.
In Alibaba's fiscal second-quarter earnings release, the improved monetization in its Taobao and Tmall Group helped to stabilize its core e-commerce growth drivers. As a reminder, the e-commerce leader instituted a 0.6% software service fee, benefiting its customer management revenue. Accordingly, CMR accounted for more than 75% of its China commerce retail revenue, up 2% YoY. Hence, it mitigated the weakness in its retail segment's direct sales component, although overall revenue retail growth was flat.
Therefore, I assess that the significant downside observed over the past couple of months in BABA is likely attributed to lowered optimism on Alibaba's e-commerce growth drivers. Although management expressed confidence in stabilizing its take rates following the implementation of the service fee, further increases seem uncertain, given the intense competitive environment in China's e-commerce market. In addition, it remains to be seen whether the improved purchase momentum from China's 11.11 festival could continue through CY2025, as China's economic and consumer spending recovery has remained uneven.
Alibaba: Needs To Diversify Its Earnings Growth Drivers Better
As seen above, concentration risks in Alibaba's TTG business are expected to hold back the market's confidence in its recovery prospects. Accordingly, Alibaba's TTG segment delivered an adjusted EBITA of RMB44.6B in FQ2, over and above its consolidated adjusted EBITA of RMB40.6B (after inter-segment adjustments). Therefore, Alibaba's Cloud Intelligence Group is far from gaining sufficient momentum to help diversify Alibaba's earnings risk profile. Although its international business (AIDC) posted a 29% surge in revenue growth, it remains a loss-making business.
Therefore, I assess that while Alibaba's growth initiatives in its ex-China business have delivered solid momentum, investors are expected to remain cautious about the recovery in its domestic e-commerce business prospects. Despite that, there are sufficient reasons to remain optimistic about Alibaba's overall opportunities. The company has invested significantly to bolster its AI-driven strategy, which is expected to enhance its user engagement and optimize purchase frequencies.
Hence, it should help stabilize its GMV growth momentum moving ahead. In addition, Alibaba management has telegraphed its confidence in lifting its monetization opportunities while working to scale its international e-commerce business. However, the need for BABA to manage potentially higher execution risks as it continues investing in loss-making businesses outside of its TTG platform could affect near-term investor sentiments. Given the market's tempered optimism on Alibaba's "D" growth grade, it's imperative for the company to demonstrate more resolve in lifting its operating efficiencies to drive profitability accretion.
Alibaba: Lowered Estimates Could Intensify Near-Term Volatility
Wall Street's revenue estimates on Alibaba have been downgraded, as analysts parsed the momentum from China's stimulus on its domestic economy. Furthermore, the increased tariffs threat from Trump's return has likely weakened investor sentiments. Despite that, I assess that Alibaba's earnings drivers remain well-anchored in its domestic e-commerce segment. Therefore, I assess that the market could have overstated Alibaba's geopolitical risks.
In addition, hedge funds have also returned more favorably to holding Chinese equities in their holdings. The relative valuations between the US market and Chinese equities could also drive a market reallocation into leading companies like BABA. Moreover, management indicated that the company still has $22B remaining in its share repurchase authorization, communicating a substantial war chest for significant dip-buying opportunities.
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