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Is the Alibaba share price undervalued?

For the past two years, Alibaba’s share price has been at the mercy of the Chinese government’s crackdown on big tech amid concerns about inflation and consumer spending. While there are signs that the government’s stance on tech may be softening, the company has started expanding into international ecommerce. 

The Alibaba [BABA] share price has benefited from the recent upwards trend in China’s big tech stocks. The stock is up 27.1% in the past month (through 27 June), outpacing Invesco’s China Technology ETF’s [CQQQ] 16% climb.

The upbeat sentiment suggests that Beijing may be softening its stance on the sector. There have been reports that the Chinese government will soon allow listings in Shanghai and Hong Kong to restart, Bloomberg reported at the beginning of June.

Alibaba shares rose 7% on the news on 9 June, before falling back when the China Securities Regulatory Commission quickly issued a statement saying it was unlikely that the failed IPO of Jack Ma’s Ant Group would be revived any time soon.

Nevertheless, the worst appears to be over for China’s big tech industry regulation-wise. Kerry Goh, CIO at Singapore-based Kamet Capital Partners, told Bloomberg: “The impact from the economic slowdown, we don’t know yet.”

Slowing growth remains a concern

The Chinese ecommerce giant has seen its growth slow down significantly in recent quarters. Revenue was up 9% year-over-year for the three months to the end of March, down from 10% in Q3 2021, 29% in Q2 2021, and 34% in Q1 2022. Covid-19 and lockdowns can be partly to blame for the drop-off, but there are broader concerns about inflation and consumer spending in mainland China.

Despite the Alibaba share price gaining around 27% in the last month, Bernstein analyst Robin Zhu believes that the stock is being propped up by interest from overseas investors. In a note to clients seen by CNBC, Zhu pointed out that Alibaba is also facing increased competition from smaller ecommerce players, such as Kuaishou [1024.HK]. “Our top picks in the sector remain JD.com [9618.HK], Meituan [3690.HK], Pinduoduo [PDD] and Kuaishou,” wrote Zhu.

Alibaba’s cloud unit is also facing headwinds. Despite swinging to its first full-year profit in fiscal 2022, growth is slowing. Revenue was up 23% year-over-year, down from a rate of 50% in fiscal 2021.

With the domestic outlook unclear, Alibaba has started to expand its ecommerce reach in Asia. Daraz in Pakistan, Trendyol in Turkey and Lazada, which has a large presence across south-east Asia, could be crucial growth drivers. As reported by the Financial Times, Alibaba CEO Daniel Zhang (pictured) said these international businesses have a “long runway ahead of us”.

An opportunity for value investors

Alibaba has invested heavily in international ecommerce businesses in recent years, which have racked up huge losses. However, with losses at Lazada narrowed in Q4 2022, the company’s expansion strategy could demonstrate that it’s on the path to profitability, which would ease pressure on margins. This is a potential upside for Alibaba, Caroline Cai, manager of the Pzena Emerging Markets Value Fund [PZIEX/PZVEX], told Barron’s.

Cai is one of a number of value fund managers increasing their exposure to Alibaba and Chinese tech stocks. “It comes down to: ‘Do you want to get involved when everything everyone is worried about is getting discounted in the valuation?’” she said.

Sid Choraria, private investor and portfolio manager at SC Asia, likes “the odds with Alibaba for five to 10 years”. Speaking to CNBC, Choraria said that Chinese big tech valuations have “become way too compelling” given Beijing’s regulatory action could soon be coming to an end.

Not everyone is sold on Alibaba, though. According to the South China Morning Post, DZ Bank’s Manuel Muehl, one of the most accurate analysts tracking the company, sees a weak outlook. Muehl, whose calls on the stock over the past 12 months have beaten 67 peers, told the Alibaba-owned paper: “Margins have come down across the board, and revenue growth has been slowing substantially.”

Muehl is the only analyst to have a ‘sell’ rating for Alibaba, according to MarketBeat data. The stock also has 22 ‘buy’ ratings and three ‘hold’ ratings. The consensus price target of $188.49 implies a roughly 60% upside.

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