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Alibaba: Still a ‘Compelling’ Long-Term Buy, Says Analyst

Alibaba (BABA) investors have had to grit their teeth throughout 2021 as shares of the Chinese ecommerce giant have come under constant pressure from macro, regulatory and structural challenges. Even so, while the issues were well known prior to the company’s F2Q22 Results (Sep quarter), the numbers still failed to impress.

All the major metrics came in below expectations; Revenue hit CNY 200.69 billion, below the consensus estimate of CNY 204.1 billion, while Adj. EBITA showed CNY 28.03 billion, missing the Street’s call of CNY 30.99 billion. Adj. EPS (per ADS) came in at CNY 11.20, also below the analysts’ forecast of CNY 11.86.

Core Commerce (CC), which makes up roughly 85% of the company’s total revenue, climbed by 31% to CNY 171.2 billion. However, the figure was both below consensus expectations of CNY 174.95 billion and a deceleration of the 35% growth exhibited in F1Q22, as the company faced tough comps and a meaningful slowdown of the Chinese economy, which flourished in the immediate aftermath of the pandemic.

But it is not just macro elements which are affecting performance. The company has also been in heavy investment mode. As such, the core commerce segment EBITA clocked in at CNY 32.27 billion, representing a 19% margin compared to a 25% margin in F1Q22 and 35% F2Q21.

Truist’s Youssef Squali notes the reason for the drop.

“We view the Y/Y decline in segment margin as a result of management’s on-going commitment to merchant support programs, in addition to investing incremental profit back into growth areas within the business, and consistent with its messaging, although the level of investment is higher than our/Street expectations,” the 5-star analyst said.

Moving forward, for FY22, Alibaba slashed its revenue guidance to year-over-year growth of 20-22%, (860-875 billion RMB), down from the prior expectation of “at least” 930 billion, reflecting a ~60-75 billion drop.

However, despite the downbeat sentiment, the analyst calls the long-term thesis “compelling” and highlights the potential for a positive impact from the upcoming Analyst Day (Dec 16-17), where BABA will “flesh out its growth strategy, and set expectations for investment and profitability.”

All in all, Squali sticks with a Buy rating although the price target is reduced from $230 to $200. Nevertheless, there’s still upside of 49% from current levels. (To watch Squali’s track record, click here)

Despite the soft quarter, only one analyst currently remains on the BABA sidelines with all 20 other recent reviews positive, culminating in a Strong Buy consensus rating. Going by the $216.10 average price target, shares will appreciate ~62% over the next 12 months. (See Alibaba stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.