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China’s Crackdown Makes BABA a Tough Stock to Buy
Stock Analysis & Ideas

China’s Crackdown Makes BABA a Tough Stock to Buy

Story Highlights

Alibaba beat analyst expectations in its fourth quarter reports, but its growth has slowed to a multiyear low. The company’s flagship and international businesses are facing tough competition, making it tough for Alibaba to expand. Moreover, the Chinese government’s crackdown on tech companies has fanned the flames.

Alibaba (BABA) has struggled in 2022 due to renewed COVID-19 lockdowns in China, ongoing inspection from regulatory bodies, and a bearish take on technology stocks. Alibaba’s share price has declined almost 50% over the past 12 months, indicating investors are in a risk-off mode.

Moreover, investors might not be willing to trust BABA since there are concerns about the Chinese economy slowing down and uncertainties relating to the Russia-Ukraine war. Yes, Alibaba’s valuation is cheap, considering it has fallen by around two-thirds from its peak of $317. However, it could take years for the stock price to rebound due to the pessimism surrounding the company. Thus, we are bearish on the stock.

Alibaba’s Revenue is Growing at a Snail’s Pace

The company’s fourth-quarter results were not inspiring. Alibaba reported a 9% increase in revenue to $32,188 million, beating analyst expectations of $29,440 million. However, this growth is much slower than the 30% it is accustomed to seeing.

Unfortunately, Alibaba’s adjusted earnings before interest, taxes, depreciation, and amortization for the fourth quarter fell by 30% year-over-year, strengthening investors’ concerns regarding the company’s struggles.

Multiple factors drove the company’s weak performance. First, Alibaba’s flagship business was fighting tough competition from fresh players like Buying and Kuaishou. Moreover, its newer enterprises, such as Alibaba Cloud, only grew by 12%.

Not just this, but Alibaba’s international divisions, such as Lazada, did not contribute much to the growth because it faced challenges from Shopee. The decelerated growth of overseas marketplaces failed to offset Alibaba’s slow growth in China and brought forward more issues.

COVID-Related Shutdowns Have Had a Crippling Effect

The surge in Covid cases has impacted Alibaba’s growth. The unforeseen shutdowns resulted in the company not offering a forecast for the current fiscal year. In addition, the company’s CEO, Daniel Zhang, said that cities with new COVID cases represented more than half of the retail marketplaces. This entails that covid-related shutdowns have made it worse for Alibaba.

The company also highlighted that macroeconomic challenges impacted supply chain and consumer sentiments. According to the management, the increased inflation has reduced consumers’ purchasing power, meaning they are less willing and able to buy products from Alibaba.

Alibaba and the Ocean of Headwinds

It has been challenging for investors to invest in Chinese companies. The country’s unpredictable government, cultural differences, and poor corporate governance are just a few barriers.

The negative relationship between the U.S. and China, and the Chinese government’s crackdown on tech companies, resulted in Alibaba losing the support of many investors. The company’s most loyal supporter, Charlie Munger, slashed his company’s holdings by more than 50%, selling 302,060 shares.

Though cheap, the murky outlook significantly complicates things for Alibaba in its attempt to bounce back to its highs. There runs a fear that Alibaba might remain cheap in the long run because the effect of the Chinese government’s crackdown on tech companies won’t wear out soon. Moreover, Alibaba is currently facing threats of being delisted in the U.S., making it even more difficult for investors to justify buying.

Wall Street’s Take on BABA

Turning to Wall Street, BABA stock maintains a Strong Buy consensus rating. Out of 23 total analyst ratings, 21 Buys, one Hold, and one Sell were assigned over the past three months. The average BABA price target is $154.36, implying 51.9% upside potential. Analyst price targets range from a low of $115 per share to a high of $205 per share.

Bottom Line: There are Better Opportunities Elsewhere

Unless Alibaba offers stable forward guidance for the year, improves its growth prospects, and tackles regulatory obstacles, investors should avoid its volatile stock, at least for the near term.

Alibaba’s growth might be decent, but its financial outlook is shaky. The company might continue generating single-digit revenue growth as its cloud business decelerates and international segments face tough competition. Moreover, Alibaba hasn’t addressed the delisting issues in the U.S., which puts a question mark over its long-term future.

It will take a lot for Alibaba to turn things around as it hopes to mount a comeback. The company faces massive headwinds that might be too difficult to overcome. It’s a bitter pill for investors to swallow as the company looks to navigate these challenges and establish its supremacy.

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