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Alibaba – to buy the dip or avoid the falling knife?

Alibaba Group (HK:9988, US:BABA) has encountered significant turbulence in recent quarters, attributed to a multitude of factors – from regulatory pressures, changing local market structure, and most recently the sudden U-turn on the spin off of its cloud business.

The prominent Chinese e-commerce giant, announced on 16 Nov a profit for the second quarter, contrasting with the loss reported in the same period last year, accompanied by increased revenues. Additionally, the company revealed its decision to forgo a complete spin-off of its Cloud Intelligence Group, opting instead to concentrate on establishing a sustainable growth model amidst the dynamic circumstances. This unexpected news was not well received by investors as in pre-market trading activity on the NYSE, BABA shares were down around 8-10%.

Earnings Call Summary

The latest update reveals that sales for Q3 2023 surpassed expectations, marking a 9% increase at $30.8 billion, and earnings performed better than anticipated, transitioning from a loss a year ago to a $1.48 profit per ADR share this time.

Nevertheless, the downside was the initial expectation for Alibaba to spin off its Cloud Intelligence Group (CIG) soon. Investors seemed eager to part ways with CIG, possibly because, with a modest revenue growth rate of just 2%, it lagged behind other businesses within Alibaba's portfolio. However, this plan has been abandoned, as Alibaba cited "uncertainties in the prospects of Cloud Intelligence Group" due to U.S. restrictions on the export of advanced computing chips, which would diminish the value of CIG if it were to be spun off.

Back to the question – is Alibaba a buy right now or still a stock to avoid?

Now that Alibaba has chosen to retain ownership of CIG, despite its modest growth rate, this decision has not been well-received by Wall Street. As observed by The Fly, a ratings observer, at least nine analysts have reduced their price targets for Alibaba.

Link: https://thefly.com/news.php?symbol=BABA

Due to a range of factors, Wall Street currently holds a less than optimistic view on Alibaba stock. However, it's noteworthy that even among the analysts reducing their price targets, there is a general consensus that Alibaba remains a buy. Notably, Morgan Stanley, with its comparatively modest $110 price target, suggests a potential c.41% upside as of 20 Nov closing price at $78.46.

Regardless of their views on Alibaba, we need to note that it is currently trading at at a mere 6.8x P/FCF (for comparison purposes: PDD is trading at 19.3x, AMZN at 89.7x), has huge substantial cash reserves and a commendable 9% top line revenue growth. Despite uncertainties surrounding its cloud business, Alibaba might be deserving of a reevaluation from investors at this moment.

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