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Alibaba: Solid Upside Despite Macro Concerns

The descent in Alibaba (BABA) stock continues, despite the Chinese tech giant having started FY22 on a solid note, including double-digit growth in revenues.

To give a little background, Chinese tech stocks, including Alibaba, are under pressure amid China’s heightened regulatory scrutiny. Alibaba stock has lost over 50% of its value in the last 12 months. Meanwhile, it has declined by about 40% this year. Regardless, I maintain a Bullish outlook on BABA stock.

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Adding to its pain is the weakness in China’s macroeconomic environment. Taking note of the situation, Needham analyst Vincent Yu reduced his Q2 estimates for Alibaba. Yu said that China’s economy took a hit from the resurgence of the coronavirus in some of its key provinces, as well as from the Zhengzhou flood.

Citing the recent NBS (National Bureau of Statistics) data from China, Yu stated that the total year-over-year retail growth rate decelerated considerably to 2.5% in August, from 12.1% in June. Meanwhile, the total online retail growth rate slowed to 6.1% from 13.9% in June.

He added that macro weakness hurts “discretionary consumption, including apparel and home appliances, which are Alibaba’s key categories.”

Yu expects the weakness in the macro environment to take a toll on Alibaba’s sales. Accordingly, Yu lowered Alibaba’s China commerce revenue estimates by 7%. Moreover, he reduced the Q2 EPS estimate to $0.83 from $1.05. In addition to macro weakness, Alibaba’s strategic investments are weighing on its margins.

Nevertheless, Yu expects Alibaba to continue to add new users and to gradually expand its market share. Further, he finds Alibaba’s current valuation “very attractive.” He maintains a Buy rating on Alibaba stock with a price target of $330, reflecting a massive upside potential of 136.3%.

Interestingly, investors’ sentiment has improved on Alibaba stock. TipRanks’ Stock Investors tool indicates that investors who hold portfolios on TipRanks currently have a Very Positive outlook on Alibaba stock, with 1.3% of these investors increasing their exposure in the last 30 days.

Overall, Wall Street has a positive outlook on Alibaba stock. Its analyst rating consensus of Strong Buy is based on 23 Buys, 2 Holds, and 1 Sell. The average Alibaba price target of $246.21 implies 76.3% upside potential to current levels.

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Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.

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