What will it take for Alibaba (BABA) stock to rebound? Its shares have been under consistent pressure over the past year, falling some 54%. While there has been some signs that the stock has bottomed, declines of 44%, 37% and 27% over the respective nine months, six months and three months have given investors pause. Is it now time to rush in?
The Chinese e-commerce giant will report third quarter fiscal 2022 earnings results before the opening bell Tuesday. It appears that SoftBank’s (SFBQF) recent assurance that it will not sell its stake in the company has established a near-term floor on the stock. Alicia Yap, analyst at Citigroup, who has a $216 price target on Alibaba, noted that SoftBank's stake in BABA is close to 24%. But is SoftBank’s promise enough to get new investors interested?
Last week, while citing a “challenging business quarter,” Mizuho Securities analyst James Lee cut his price target on Alibaba. Though he maintained his buy rating on the stock, Lee cut his price target to $180 from $215. From current levels of around $123, that still represents more than 46% potential upside. Alibaba has struggled through corporate governance issues and a rocky political standing in China which has impeded its growth.
Other analysts such as Barclays’ Jiong Shao who listed Alibaba as a “top pick,” has come to the BABA’s defense, saying Chinese tech companies are "too important to be ignored.” Shao initiated the stock as Overweight with a price target of $275 per share, suggesting 125% upside from current levels. BABA stock trades at a massive discount especially when compared to its FAANG peers. However, as with the FAANGs, Alibaba can’t afford to disappoint the market with weak earnings and guidance. In that vein, the company still has tons of ground to make up.
In the three months that ended December, Wall Street expects the Hong Kong-based online retailer to earn $2.54 per share on revenue of $38.68 billion. This compares to the year-ago quarter when earnings came to $3.35 per share on revenue of $33.66 billion. For the full year, ending May, earnings are projected to decline 17.6% year over year to $8.26 per share, while full-year revenue of $134.98 billion would rise 21.9% year over year.
Thanks to its massive scale and its e-commerce ecosystem, Alibaba has had multiple streams of revenue which insulates its from economic downturns. However, the company has had few answers to China’s regulatory enforcement against the tactics that enabled BABA to become the force that it has. China’s crackdown on anti-monopoly, cybersecurity oversight and antitrust practices has put Alibaba’s collective businesses in the crosshairs of significant regulatory risk.
China’s regulatory push cost Alibaba close to $3 billion in combination of new taxes and fines. While it does appear that China has lifted some of that pressure, the risk still exists that it can resume its crackdown at any point. And if it does, this may cause SoftBank to reconsider its stake in BABA in a possible sale, especially if the company continues to underperform as it did in the most-recent quarter when Alibaba missed on both the top and bottom lines.
Q2 revenue of $31.43 billion fell short of expectations by $670 million. Adjusted EPS of $1.75 also disappointed investors, missing by 19 cents. On Tuesday investors will want to see growth reaccelerate. To dispel concerns, BABA on Tuesday must deliver top and bottom-line beat, upside guidance and positive commentary about growth prospects for the balance of fiscal 2022.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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