Down 65% Since 2021, What’s Next for Alibaba Stock?

Chinese e-commerce and cloud behemoth Alibaba stock (NYSE:BABA) declined by about 6% over the last week and also remains down by 12% year-to-date, considerably underperforming the broader tech indices. There have been a couple of developments for Alibaba in recent weeks. Firstly, the company posted a relatively mixed set of Q2 FY’24 results. While revenue missed estimates, rising 9% year over year to RMB 224.8 billion (about $31 billion), earnings came in better than expected at RMB 40.2 billion ($5.5 billion), or $2.14 per American Depositary Share (ADS). All the company’s key business segments grew year-over-year, although growth rates cooled off considerably compared to Q1. Separately, Alibaba also announced that it would be scrapping its plans to spin off its cloud unit, citing that the recent expansion of U.S. restrictions on the export of advanced semiconductor chips was hurting the business. The spin-off was intended to unlock value for investors given that the Cloud segment included the cloud computing and artificial intelligence business, two high-profile and growing businesses. Moreover, the cloud spinoff was seen as a significant step toward Alibaba’s plans of restructuring itself into a holding company via IPOs for its individual business groups (including e-commerce, media, and food delivery, logistics). This restructuring was seen as helping to reduce the overall conglomerate discount placed on Alibaba’s stock and allowing investors to better value businesses individually. Now the scrapping could indicate that things may not be going as expected.

Amid the current backdrop, BABA stock has suffered a sharp decline of 65% from levels of $235 in early January 2021 to around $80 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, BABA stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -49% in 2021, -26% in 2022, and -12% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 18% in 2023 (YTD) – indicating that BABA underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BABA face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

That being said, we remain positive on Alibaba stock at current levels. Alibaba stock has underperformed over the last few years due to regulatory issues primarily relating to Alibaba’s affiliate and digital payment services major Ant Group. However, these issues could largely be in the rear view mirror after Alibaba paid sizable fines, with China’s Central Bank noting earlier this year that the domestic tech industry will see “normalized supervision” going forward. This is giving investors confidence that China is winding up its nearly three-year-long crackdown on technology companies, removing a considerable overhang on big tech stocks such as Alibaba. There have also been some positive developments on the macroeconomic front. While the real estate sector crisis in the country remains a concern for the broader stock market, China did report better-than-expected retail sales and industrial numbers for October. This is a positive for e-commerce players like Alibaba. Alibaba’s valuation is also compelling. At the current market price of about $78 per share, BABA stock trades at under 9x forward earnings, which is very fair in our view. Alibaba’s overall valuation is much more favorable compared to U.S. e-commerce behemoth Amazon, which trades at roughly 55x forward earnings, with almost similar near-term revenue growth projections and a weaker cash flow profile. Although the risks for Chinese stocks are typically higher given the potential regulatory and political concerns, we still believe that such a large difference in valuation may not be warranted. We estimate Alibaba’s valuation at about $122 per share indicating a considerable upside over the market price.  See our analysis of Alibaba revenues for more details on how Alibaba’s revenues are likely to trend.

[1] Month-to-date and year-to-date as of 11/20/2023
[2] Cumulative total returns since the end of 2016

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