The past couple months haven’t been a fun time to own shares of Chinese large-cap tech titan Alibaba (BABA). From the first day of November, through the close of trading Thursday, shares of the e-commerce giant have lost nearly 30% of their value — about 10 times worse than the 3% losses seen on the Nasdaq as a whole.
Partly, this was Alibaba’s own fault. In mid-November, the company’s fiscal second quarter 2022 earnings report missed on both top and bottom lines, with net profit for the quarter coming in 10% below consensus estimates. Worse, management lowered guidance significantly, predicting the company might grow revenues as little as 20% this year — versus previous guidance for 28% growth.
Partly, however, Alibaba’s downfall arose from factors outside its control, in particular, the U.S. Securities and Exchange Commission’s demand that Alibaba’s Chinese auditors open up their books for independent inspection by the Public Company Accounting Oversight Board within three years — under threat of Alibaba getting removed from its Nasdaq listing.
Because the SEC’s disclosure demands conflict with instructions from on high — the Chinese government — Alibaba can’t do much to affect the second factor weighing on its stock price. But it can try to fix the problems with its business, and as Baird’s 5-star analyst Colin Sebastian explains, that’s just what Alibaba is trying to do.
Relating the contents of Day One of Alibaba’s two-day “Investor Day” currently ongoing, Sebastian reports that “despite significant headwinds… Alibaba is forging ahead with a multi-pronged strategy for growth” that will keep the company in “investment mode” for the foreseeable future. The company is expanding its logistics footprint and offering more local and grocery delivery services, upgrading its platform, and experimenting with “community buying,” where groups of customers join together make large purchases of products (at a discount) and then distribute the loot amongst themselves.
Sebastian reminds investors that Alibaba has a large total addressable market worth 15 trillion Chinese yuan ($2.35 trillion) spread across 600 million Chinese internet users, and has effectively penetrated some of the most attractive segments of this market, including 90% of “younger consumers.” It’s also exploring new markets such as selling “unbranded” (i.e. generic) products to consumers via Taobao, and opening new markets in “less developed areas… [that are] still in the early stage of digitization” and therefore can only get bigger from here. The company is also experimenting with package delivery via unmanned vehicles (i.e. drones) as it works towards offering two-day and even same day delivery of orders.
Anticipating growth, Sebastian values Alibaba stock at an enterprise value 15 times his estimated earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023. On this basis, he assigns Alibaba stock an “outperform” rating and a price target of $180 per share. If it gets there, Alibaba stock could return a 50% gain from here over the course of the next year. (To watch Sebastian’s track record, click here)
Overall, Alibaba has a rare bullish outlook according to the Street. TipRanks reveals that in the last three months, BABA has received 21 “buy” ratings and just 2 “hold” ratings — giving it a Strong Buy analyst consensus. Meanwhile, the $208.29 average analyst price target translate into ~71% upside potential from the current share price. (See BABA stock analysis)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
