The mounting competitive pressure on Alibaba (NYSE: BABA) has become a shortfall that even the general population is aware of now. Despite having a strong and leading e-commerce platform, competition from peers like Pinduoduo (PDD) and jd.com has become a growing concern for the company.
Moreover, the vertical segments that the company operates in, such as food delivery, offline retail, and entertainment, are buzzing with stronger rivals which are keeping Alibaba from holding a leading position in these domains.
Furthermore, strict laws in China, especially for the Internet, education, and real estate sectors, continue to water down Alibaba’s growth prospects. These concerns are expected to reflect in the company’s 3QF22 earnings results, which is scheduled to release on February 2.
More Troubles in Paradise?
However, these are not the only issues that China’s e-commerce leader is facing. There are many undercurrents that Needham analyst Vincent Yu highlighted in a recent research report.
The third wave of the new coronavirus variant once again put a halt to outdoor activities of multiple cities across China. This has hit China’s consumer spending. These issues altogether have weakened the country’s macroeconomic condition, which is ultimately affecting the health of Alibaba’s business.
Yu pointed out that on a year-over-year basis, the growth rate of monthly total retail slowed to 3.9% in November from 12.1% in June, “despite the positive impact from Single’s Day promotional campaign.” The analyst foresees a larger deceleration of total retail in December.
Along with the retail business in China, the macro weakness is impacting various business lines in various forms, such as tighter client budgets on branding ads. Instead, advertisers are investing more into ads that bring immediate transaction value.
The apparel category of the Chinese economy was more deeply hit by the narrowed consumer spending than any other domain. As a large portion of Alibaba’s sales comes from the apparel category, Yu expects Alibaba to report heavier impacts to its top line than its peers.
Expert Cuts View
Taking into account all the near-term headwinds, Yu trimmed his 3QF22 estimate for Alibaba’s international commerce revenue by 7%. He also notes that the Aliexpress segment is expected to realize a full quarter of negative impact from the recently changed European regulation on the exemption of import value-added tax for goods below 22 Euros.
This apart, Yu’s also has a negative view for revenues from Alibaba’s cloud computing, and digital media & entertainment businesses. Overall, he lowered his estimate for total revenues by 1%.
Most importantly, Yu cut the price target to $180 from $230.
Room for Upside?
Nonetheless, he reiterated a Buy rating on the BABA stock. “We believe that Alibaba’s well-established ecosystem and strategic position in the e-commerce value chain are competitive barriers to new market entrants. We believe Alibaba will be able to add new users from lower-tier cities by using new e-commerce platforms that focus on selling value-for-money products,” he argued.
Yu believes that Alibaba’s new sales format — Taobao Live — will drive the company’s top line. Moreover, Alicloud looks well poised to dominate the public cloud market in China.
The rest of Wall Street is quite upbeat about Alibaba, with a Strong Buy rating based on 21 Buys and 3 Holds. The average BABA price target is $194.71.
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