To The Moon

Alibaba Group Holding Limited (NYSE:BABA) recentlyreported results for the September quarter, and while the retailer did not see a drop in sales growth below 0%, I believe there are still significant risks associated withAlibaba in the face of a weakening retail sales environment.

This month's retail trade growth surprised negatively, putting additional pressure on Alibaba's sales, which rose only a pitiful 3% in the third quarter.

The decline in retail trade, combined with Alibaba's slowing sales growth and a new protest in China over lockdown restrictions, indicate that Alibaba's stock faces significant downside risks.

Full Disclosure: I Am Short Alibaba

I have a short position in Alibaba through put options, which you can read abouthere, and I am thus biased against Alibaba and other Chinese large-caps.

Shorting stocks carries a risk, which in my case is quantified by the put premium I paid, which also represents my maximum potential loss.

However, because my position represents less than 3% of my portfolio, the risk in terms of total exposure is actually quite low. I anticipate fully exiting my short position in the next 2-3 months, and my personal price target for Alibaba is $50, at which point I would consider going long BABA.

Of course, there are Alibaba-specific risks here as well, which could lead to BABA repricing and the stock jolting higher. If Alibaba's sales growth or margins improve in the short term, it would pose a significant risk to my short thesis and the value of my put options.

Unexpected Retail Trade Growth Decline In October Is Adding To Alibaba's Woes

The main issue with Alibaba right now is that sales growth is slowing dramatically, resulting in a 0% growth quarter in June. As a result, Alibaba's stock dropped to a new 52-week low in October, but macro risks have only increased since then.

Retail sales growth in China slowed dramatically in the first month of the fourth calendar quarter. In October,retail trade growth was minus 0.5% YoY, resulting in the fourth quarter (non-consecutive) of negative industry growth in 2022.

Retail growth fell sharply from 2.5% in September to 0.5% in October, falling short of expectations for industry growth of 1.0%.

China's Retail Sales Growth (Tradingeconomics.com)

The drop in retail trade growth coincided with an increase in Covid-19 infections and harsh lock-down policies. Beijing's harsh lock-down policies, which frequently resulted in entire cities being quarantined, have now erupted into major,nation-wide protests in China, adding to Alibaba's already slowing eCommerce business.

Alibaba's sales increased by only 3% in the September quarter to RMB 207.18 billion, or roughly $29.12 billion.

Even though Alibaba saw a sales rebound compared to the June quarter, when sales growth dropped to 0% for the first time, a paltry 3% sales growth for a company as large and spoiled for growth as Alibaba is hardly cause for celebration.

Yearly Sales Comparison (Alibaba Group Holding Limited)

The ongoing pressure on retail sales did not translate into a further contraction of Alibaba's margins in the September quarter, but this could change if retail trade growth slows further in the final two months of the fourth quarter.

I believe that the outbreak of widespread protests in China, combined with harsh lockdown restrictions, could be a very negative catalyst for the retail sector and, in particular, consumer spending.

Alibaba's business is at a crossroads, and the coming quarters will reveal whether the company eventually experiences its nightmare scenario of sales growth falling below 0%.

Alibaba's margins (calculated on an EBITA basis) were 17% in the September quarter, up from 14% the previous year, owing primarily to lower losses in LCS (Local Consumer Services) and International Commerce.

Segment Results (Alibaba Group Holding Limited)

Alibaba's Stock: At A Pivotal Point, Too

From a chart standpoint, BABA is also at a crossroads. The stock is just above its 50-day moving average, which could signal a bullish signal if Alibaba's stock price falls below that line. This would severely taint Alibaba's chart, partly because the stock failed to break through the 200-day moving average line in July, resulting in two strong bearish sell signals in quick succession.

This means that if the stock falls below the 50-day moving average line again, a sell signal is generated, which could put renewed pressure on BABA in the short term and push the stock down to its recent lows.

BABA Share Price Moving Average (StockCharts.com)

Retail Trade Woes And New China Protests Not Yet Reflected In Alibaba's Valuation

If China's currently volatile situation worsens, Alibaba's situation could deteriorate further. The market is currently forecasting $122.18 billion in sales this year, representing a meagre growth rate of only 3.1% YoY.

Revenue Estimate (Yahoo Finance)

The market also expects average earnings of $8.56 per share, giving Alibaba a P/E ratio of 9x. Under normal circumstances, this ratio would make a stock appealing, but given the growing number of risks affecting Alibaba's business, particularly the outbreak of new mass protests in China, I believe investors should wait for a bottom to form.

Why Alibaba Could See A Higher/Lower Valuation

Alibaba remains uninvestable in my opinion due to rising political and, now, economic uncertainty in Alibaba's key market, China.

In terms of sales growth, the company is not out of the woods yet, and Alibaba's sales growth could fall below 0% in the December quarter if retail trade growth remains weak in November and December, which I believe is likely.

My Conclusion

I believe Alibaba is in serious trouble, not only from a political and business growth standpoint but also from a chart standpoint.

Slowing retail trade growth in October strongly favors an ongoing industry slowdown, and Alibaba is not immune to slowing industry growth. In fact, I believe that the last quarter's 3% YoY sales growth buys Alibaba only a little more time to keep its head above water.

Given that industry drivers have turned negative and that sentiment overwhelmingly speaks against Alibaba amid the outbreak of new protests in China, I would expect the Chinese company's valuation multiple to continue to contract.